Why this sell-off looks overdone…and premature

Wednesday, 4 December 2019
Adelaide, Australia
By Bernd Struben

  • Markets
  • Gold gains…for now

If there wasn’t so much money on the line, it would be funny.

Of course there is a lot of money at stake. Money investors hope to use to better their lives…and the lives of their families. University tuitions; international travels; a comfortable…and perhaps early…retirement.

We all have different goals when we buy shares in a stock or an ETF. But there’s one goal everyone has in common. To see the value of those investments go up. Way up.

This week that goal has been in rapid retreat for the majority of stocks.

Yesterday’s 2.2% drop in the ASX 200 saw $45 billion disappear into the ether. And that’s just from the top 200 stocks, mind you.

Today looks to be almost as painful, unless you’re shorting the market. At time of writing the ASX 200 is down 1.49% in intraday trading.

That’s decidedly un-funny.

What is amusing, though, is the root cause of the global sell-off.

That would be Donald Trump, the market-mover-in-chief. More specifically, it’s his unorthodox negotiating strategy. While this has been on clear display for three years now, investors still can’t wrap their heads around it.

Yesterday’s global market rout can largely be pinned on Trump’s decision to slap tariffs on Brazilian and Argentinian steel and aluminium imports into the US. That’s in retaliation for runaway inflation devaluing their currencies. And putting US producers at a financial disadvantage.

Australia remains on Trump’s nice list. But there’s no shortage of pundits in the mainstream today warning our own tariff exemptions could be next to get the axe.

For the record, I don’t see that happening. But there’s nothing markets like less than uncertainty.

And overnight our time, Trump dished out a heap more uncertainty.

Speaking to reporters in London, Trump rattled markets that have already largely priced in an easing of the US–China trade war.

I have no deadline,’ Trump said. Adding:

In some ways, I like the idea of waiting until after the election for the China deal. But they want to make a deal now, and we’ll see whether or not the deal’s going to be right; it’s got to be right.’

Trump may not have a deadline. But the next round of US tariffs on Chinese imports does.

That deadline is 15 December. If phase one of a new trade deal isn’t reached by then, the US is set to impose an extra 15% tariffs on US$156 billion of Chinese merchandise. China would almost certainly retaliate.

That prospect sent investors scurrying for the exits.

While it’s good to be cautious, the sell-off looks overdone…and premature.

This is textbook ‘art of the deal’ negotiating we’re seeing here. Be unpredictable. Keep your opponent guessing and off balance. And dial the bluster up to 11.

Trump and Xi Jinping both still need a partial cease fire and pullback in the trade war. With a deal benefiting both leaders, I believe we’ll see that happen before 15 December. It won’t end the trade disputes. Those are likely to drag on for years. But it should soothe investors’ jittery nerves…at least until 2020.

Now a look at the markets…

Markets

Overnight, the Dow Jones Industrial Average closed down 280.23 points, or 1.01%.

The S&P 500 closed down 20.67 points, or 0.66%.

In Europe the Euro Stoxx 50 index closed down 15.67 points, or 0.43%. Meanwhile, the FTSE 100 lost 1.75%, and Germany’s DAX bucked the losing trend to close up 24.61 points, or 0.19%.

In Asian markets Japan’s Nikkei 225 is down 292.01 points, or 1.25%. China’s CSI 300 is down 0.17%%.

The S&P/ASX 200 is down 100.19 points, or 1.49%.

West Texas Intermediate crude oil is US$56.41 per barrel. Brent crude is US$60.82 per barrel.

Turning to gold, the yellow metal is trading for US$1,479.73 (AU$2,169.69) per troy ounce. Silver is US$17.17 (AU$25.07) per troy ounce.

One bitcoin is worth US$7,316.88.

The Aussie dollar is worth 68.50 US cents.

Gold gains…for now

As you saw above, most global indices closed…or are about to close…lower on the increased uncertainty of any trade resolution.

Gold, as you’d expect, gained on investor doubts overnight. The yellow metal is up US$17.24 per ounce since I penned yesterday’s Insider.

That’s seeing most Aussie gold miners buck the wider losing trend today.

Newcrest Mining Limited [ASX:NCM], for example, is up 1.2% in intraday trading.

Resolute Mining Limited [ASX:RSG] is up 2.2%.

And Newmont Goldcorp Corp [NYSE:NEM] is up 1.7%.

It’s a nice turnaround for the gold miners. Most have lost ground since gold peaked on 4 September at US$1,552 per ounce. Though year to date most are still well in the green.

With that said, the outlook for gold doesn’t bode well for any big gains from gold stocks over the next few weeks. Especially not if the US and China make nice with an interim trade deal, as I suspect they will.

That picture should change early next year. But in the meantime you may want to hold off on adding more gold stocks to your holdings.

For a more detailed and technical analysis on that, here’s an excerpt from Greg Canavan writing in yesterday’s Crisis & Opportunity:

***

Gold correction not done yet

The gold correction continues.

The bad news is, I (Greg) don’t think it’s done yet.

In your 5 November update, I wrote that ‘gold futures hold the key’.

What did I mean by that?

Well, the gold futures market plays a very important price setting role. That’s why I keep a close eye on it.

Specifically, I watch the positioning of the ‘managed money’ component. It’s a good barometer of short term sentiment towards gold. 

Unfortunately, sentiment towards gold remains bullish. ‘Managed money’ remains ‘net long’ on nearly 200,000 futures contracts. I say unfortunately because it’s a contrarian indicator. This positioning is more characteristic of tops than bottoms.

For this reason, I think the price needs to fall further. I wouldn’t be surprised to see gold fall to at least US$1,430 an ounce, which is around the green line in the chart below…



chart image
Source: Optuma
Click to enlarge

A look at the Aussie gold stock index supports this view. As you can see in the chart below, after a big run during June and July, gold stocks have corrected lower. The moving averages recently crossed to the downside. This indicates gold stocks are in a medium term downtrend.

If the gold price does take another leg down, I would expect to see the Aussie gold stock index fall back to support around 6,000 points.



chart image
Source: Optuma
Click to enlarge

Of course, I don’t know if this will happen or not. But it’s at least good to be mentally prepared (and not shocked) by such an outcome.

If it does happen, your gold stocks will move lower. And you’ll feel like selling out, as you think it can only get worse.

But this is usually the point where markets find a bottom.

So if you’re a gold owner, steel yourself for one more correction. If it happens, you’ll be prepared. If it doesn’t, then there’s no harm done.

***

To be clear, Greg isn’t recommending selling your gold stocks.

He is recommending you wait and see if gold does move lower before buying any more.

I’ll let you know when that outlook changes.

Cheers,
Bernd