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BookmarkWith gold falling for the 7th straight week and the Dow nearing 20,000, below is an important look at the big picture for global markets, gold, silver, and the miners.
– Overnight stock and bond markets saw small changes and were not worthy of any comment. As for the equity party here in America, the early going saw the indices very slightly red, as there has been a bit of a pause in the euphoria…
Instant Gratification
I have been noting since the election how it is understandable that we have seen a swing towards economic optimism similar to what we saw in 1980. However, as the latter period demonstrated, it took some time for Volcker to break the back of inflation and for the changes that Reagan implemented to have an impact. Fast forward to today, where stock prices are at a minimum two-and-a-half times higher and we have a bond market in even worse decline. Meanwhile, all sorts of optimistic conclusions have been discounted in stock prices while little weight has been given to possible negatives or timeline considerations.
I haven’t mentioned her in a while, but my friend Joanie summed up the situation eloquently in her note today when she said:
“An economy which has been beat to schmitt by ham-fisted, recidivist, Keynesian missteps, while undergoing tectonic changes all on its own [i.e., the advance of technology], conjures up the visual of dropping mercury on the floor and trying to gather it back up and stick it in a vial: every time you touch it, it splits off into myriad of different directions. I guess another plea for some reflection on the possibility that the entire Trump miracle won’t come off without a single hitch is out of the question? It looks that way.”
A Good Case For Bad News
I couldn’t agree with her more about that. Most likely good things will happen to the economy, but we’ve got financial markets that are in bubble territory, we’ve had eight years of borrowing from the future, and a lot of consumers are stretched, so higher interest rates are not going to help on the home-buying front, just to pick one example.
Thus, the likelihood of a serious dislocation in the stock market is very high and the odds of this all working out are extremely low, but none of that handicapping will change anything. The rally just needs to exhaust itself. As I have noted in the past, the rally in 1980 for the S&P didn’t quite make it to December, although the Dow did manage to sprint to what was then a new high of just over 1,000 in the early days of January, but that was all she wrote.
It Should Be Worth the Wait
I believe our rally is on borrowed time, but given the lunacy of all that has transpired I don’t have any interest in trying to pick a top. I will let the market show me it really wants to go down before getting involved because there is such a long ways to fall.
Turning back to the (non)action, the indices leaked a bit for the whole day and closed with the very small losses you see in the box scores. Away from stocks, green paper was a little weaker, oil lost 1.5%, fixed income higher, and the metals were mixed with roles being reversed. Today silver was down 1% while gold was flattish.
Included below are three questions and answers from the Q&A’s with Bill Fleckenstein.
Bonus Q&A
Question: Hi Bill, Do you believe that deregulation will spur on great economic growth or have you come across any research describing the regulations that if changed will spur on great economic growth? Other than sweeping away opposition to pipelines and elimination of the Volcker rule I have not come across any other regulatory changes that will create jobs. The latter may just move jobs from hedge funds to trading desks in big banks. I know regulations can and do slow down approvals of real estate development…any type of construction. But the great thing about business projects is that when the business case says there’s money to be made, business people will fight through, work through all the government paperwork to get the approvals and build the business. I just can’t figure out what all the excitement is about deregulation adding economic growth. It all strikes me as an emotional feeling not supported by any business case input.
Answer from Fleck: “Relax. Stop trying to make sense out of emotions. That said, cutting back on senseless red tape and regulations will help businesses and the economy for sure, and there are lots of knock-on effects of optimism that we could discuss. But I think the market rally is one of the greatest blowoffs we will ever see (setting up potentially one of the greatest short-selling opportunities that I have ever seen) and this optimism has caused people to be blind to all the issues I have discussed. No one seems to be aware of what happened after the 1980 elections.”
An Important Look At The Big Picture For Gold & Miners
Question: Sorry, two questions in one day. I was holding a client review yesterday and it was certainly down beat as his account fell pretty hard in November and December with the metals. But as we went over everything, it was quite stunning to the client as to how his individual securities performed so far this year. For example, AEM +43%, GG +6%, NGD +33%, PAAS +121%, PVG +43%, Sprott Gold +6%, Sprott Silver +16% and his PIMCO Bond Funds combined to average +4%. When looking at the holdings individually, I think most individual investors would have killed for a portfolio like that in 2016. But the fact that his account was up over 30% mid-year and is now only up just 14% is what had him tore up, until we went over the individual holdings. I am guessing that the people that are most upset are folks that pressed when things were going well and have been burned in the second half of the year. My newest clients who were under invested in the metals, where we added in the fall as the metals were falling thinking that the bear market in gold was truly over have been burned. Believe me, I can sympathize. But investors that have been long and kept their longs without pressing have had a decent year this year, provided gold doesn’t collapse in the next two weeks which I know anything can happen, especially with gold.
Part 2 – My question is about taking profits this past summer. I clearly wish I had but our strategy in gold, silver, and the miners is a long term strategy without trying to get cute. The only time we took major profits in our positions was in 2011 when silver almost hit $50 and gold $2,000 and we sold half across the board. Since then we have been consistently adding to our positions on major down drafts whereby we had a lot of shares when things took off earlier this year. Our strategy is to keep these positions in tact (provided something doesn’t happen company specific) until they reach their 2011 highs again and then reevaluate where we are in terms of the overall economic picture. My premise is that if you truly believe gold is going back to $1,900 an ounce, then why not hold your metals and miners positions until that occurs. Because if you have added to your positions on the downside, then the reward at the end should be huuuge (as Trump would say). Provided gold does indeed return to $1,900 one day. Is this logical or am I missing something?
Answer from Fleck: “I think your strategy (one of many that people could have) is sound, yes, depending on your total exposure of course.”
Question: Bill: Re: yesterday’s reader’s comment: “Bulls typically don’t retrace 100% of a move which we are close to doing,” We do in fact have two precedents for such behavior in the current bull market. 1999-2001 was a full retrace at the $250+ level, with an interim high of $320+ in the interim. And of course, 2007-2008 looped from the mid $600s through the mid-$900s and back again. Both times, the near-100% pullbacks were followed by bull surges that almost tripled the gold price 3-5 years later. Meanwhile, the Gold Miner’s Bullish Percent Index has ranged from 100% in July to 7% in November. Despite further declines in the gold price, it’s presently sitting around 11%. I know negative sentiment doesn’t confirm a bottom in itself, but I just wanted to offer some words that I hope are encouraging to a fellow Rap reader.
Answer from Fleck: “OK, thanks. Lots of extremely lopsided data points showing up now.”
By Bill Fleckenstein President Of Fleckenstein Capital
December 22 (King World News)
