With Q4 2018’s twenty-percent bear market in blue-chip stocks now almost completely recovered, investors and analysts are breathing a sigh of relief and preparing for more upside in the stock market. But there’s something strange going on: gold has been rising in tandem with stocks – an unusual correlation, and possibly indicative of something sinister going on.
It’s not your typical market rally, but perhaps a sea change that’s less blue-chip bullish than people think. For stocks and safe havens to move together like this is problematic for stock market investors: if the smart money is buying gold and the retail traders are piling into stock market index funds, it’s not hard to figure out who’s most likely on the wrong side of the trade.
To be completely honest, if stocks and gold are both rising, I’m much more likely to believe that the commodities market is “telling the truth” than the stock market. Blue-chip stock indices tend to price in good news before it even happens, whereas gold traders tend to be more cautious, skeptical, and sophisticated in their outlook.
In this case, it’s a full and mutually satisfactory resolution to the U.S.-China trade talks that’s been priced into the stock market. Sure, the gold market is hopeful of a trade resolution, as this could boost the yuan, which could prompt Chinese investors to purchase more gold.
So yes, gold holders would be happy to see a trade talk resolution, but they’ll be perfectly fine if the trade talks break down or just go nowhere, as this would most likely boost gold’s value as a safe haven.
Blue-chip stock investors, on the other hand, need a resolution to the U.S.-China trade talks to happen, and soon. A happy ending to the story has already been priced in, and it needs to actually happen now. This is typical of the stock market, where prices are bid up on hope and rumors, only to be sold off when reality disappoints.
It likely goes even deeper than that: much of the surge in gold has been due to central banks around the world accumulating gold at an unprecedented rate. With a global economic slowdown afoot, central banks have been buying the most gold they have since it was de-pegged from the dollar back in 1971:
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This is no ordinary gold hoard: it’s an accumulation of massive proportions, to the tune of 1.3 trillion ounces of gold. And it’s showing absolutely no signs of slowing down, as the multi-year, post-financial-crisis gold accumulation trend has maintained its pace in 2018 and early 2019:
China and Russia, two major world powers, have led the pack in terms of gold-buying zeal. The Bank of Russia, amazingly, has been purchasing gold every single month since March of 2015:
Other world central banks and governments that have been augmenting their gold reserves include Turkey, Hungary, Kazakhstan, Poland, Hungary, Germany, France, Italy, Qatar, and Venezuela. They’re seeing trouble ahead for the global economy and taking their defensive positions before the markets reflect the reality of the situation.
They’re also seeing what can’t be denied any longer: inflation is bound to increase dramatically as governments spend recklessly and devalue their fiat currencies through unchecked money printing. A rising inflation environment, spurred by record levels of global sovereign debt, is gold-bullish – and central banks are positioning themselves accordingly.
The question, then, is whether you are positioning yourself accordingly. Gold and the stock market won’t move up together forever, and I’m looking forward to the divorce, as I’m prepared to profit while others panic.
Chief Editor, CrushTheStreet.com
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