Dow 30,000. Gold down. Where’s the Opportunity?

Wednesday, 25 November 2020
Wollongong, Australia
By Greg Canavan

[3 min read]

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Repeat after me everybody:

The Fed makes stocks go up…

The Fed makes stocks go up…

The Fed makes stocks go up…

If everyone believes it, how can it not be true?

The Wall Street Journal celebrated ‘Dow 30,000’ overnight by giving credit to the Fed:

The Dow Jones Industrial Average rose above 30000 on Tuesday, extending an eight-month rebound that has taken many analysts by surprise. The run has put the Dow up more than 60% from its March low, when the U.S. Federal Reserve ended a panic that wiped out trillions of dollars in investments by outlining a plan to counter the pandemic’s economic stress.

The Federal Reserve ended the panic, did it?

The reality of the situation doesn’t matter. What matters in markets is what everyone believes to be true, whether it is or it isn’t. And once again, belief in the Fed and their ability to support markets (although they clearly can’t do anything about the momentary plunges) is rock solid.

The Wall Street Journal article is a cracker. It’s clearly written by a youngster who knows nothing else other than a buy-the-dip mentality. Check it out…

The U.S. stock boom has its roots in tactics that fund managers, small savers and Robinhood traders alike have applied over the past decade:

Don’t hide from markets by hoarding cash.

Keep hold of your investments, and returns will follow.

When there’s a crisis, buy.

Who can argue with that!

Buy the dip, idiots. Investing is easy!

But wait, there’s more…

The market appears locked into a self-perpetuating upward cycle, defying the pandemic and accompanying economic woes. Some pessimists say today’s gains will inevitably lower returns tomorrow. But low interest rates mean investors big and small can’t expect to make much money in less-risky investments like bonds. So they are betting that the market’s momentum will continue, whether passively through index funds or actively with a buy-on-dips mantra.

Wait…what?

A ‘self-perpetuating upward cycle’?

Look, I actually agree with a lot of this stuff. Clearly, the path of least resistance is to just close your eyes and buy ‘stonks’. And then pray you have the mental toughness and conviction to hold on, and even buy, through the gut-wrenching corrections (which very few actually do).

But the contrarian in me gets very nervous when I read these sentiments plastered across one of the world’s most-read financial publications.

The market is anything but a self-perpetuating cycle. It is designed to inflict pain on those who try to take short cuts, or who think investing is ‘easy’.

And right now, it feels like the market is about to inflict some pain on many investors.

What to do about it then?

Well, as I said, I actually agree with a lot of the ideas in the quoted article. Sitting in cash for the long term is not a solution. But neither is ploughing all your capital into passive index funds, which is the ultimate momentum trade.

You’re better off diversifying across a number of asset classes: stocks, bonds, gold, commodities and cash.

Hold cash for its optionality. That is, use it when there is a genuine sell-off. Then build it up again as whatever asset class becomes overheated.

Right now, the trade to make (for longer-term portfolios) looks to be in deploying surplus cash in gold and gold equities, and taking some profits in international shares…or even Aussie shares, which are now very extended in the short term.

Gold is down sharply over the past few trading sessions. At time of writing, it was just above US$1,800 an ounce. I’ve been warning Crisis & Opportunity subscribers that gold could fall to this level for some time now.

As has Shae Russell, editor of Hard Money Trader. Here’s a little peek of her subscriber-only update, released yesterday, discussing the potential move for the gold price from here:

The next stop for gold is likely to be between US$1,795–1,810. But honestly, not for long. If gold falls below US$1,795, I then expect a dip down all the way to US$1,720–1,760.

If gold does that, that’s nearly a complete 50% retracement from the August high. Which — as odd as it sounds — is in fact a very bullish signal for the gold price. If gold completes a 50% Fibonacci retracement, I would start saying we’ve found the bottom for this lot of sell-offs.

Shae recently predicted this will be the last time to buy gold under US$2,000 an ounce. I think she’s right. To see which stocks she’s recommending in this rout, click here.

Yep. In my view, this is just a short-term rotation out of gold and back into growth assets.

While the stock market is celebrating right now, we know the reality. And that is, stimulus only has a short-term impact on highly indebted economies like the US. This reflation trade might have a few months or even longer in it. Or it may be just a few weeks. I don’t know.

I just know that it’s not sustainable. There is no escaping the debt trap that the world’s major economies are in. Which makes gold an indispensable part of your long-term portfolio.

Right now, gold is on sale. It may be on sale for weeks or months. All I can say is that you should look to take advantage of it.

Cheers,
Greg