My official signal hasn’t yet been given, but this is my editorial, so I’m reserving the right to override it. If like me, you believe the post-2009 bull market in equities has hit a wall, then why wait to buy gold? To recap, an Atlas Pulse Bull market requires a score of three out of three on these simple tests:
1. Easy money (defined as US cash real – ie, after inflation – interest rates below 1.8%).
2. The long-term gold trend in non-dollar terms must be positive.
3. Gold must be beating the stockmarket.
I’ll go through them in turn.
With US inflation (as measured by the CPI index) at 2.5% and interest rates at 2.25%, the real rates test is met, as they are negative. The risk comes from the relentless pursuit of sound money, which is possible as the Taylor Rule states that US interest rates should be 5%. However, recent talk of the Fed slowing down its tightening stance is gaining traction.
On the second condition, I use a 35-month moving average to measure gold in multiple currencies, excluding the dollar. When the gold market is quiet, it goes through periods of mirroring the dollar, and so by stripping out this source of volatility, you get a clearer picture of the underlying trend. This long-term signal remains in rude health.
The final test is that gold should be beating equities, specifically the S&P 500. While the 35-month trend isn’t yet positive (as of December 2018), I am overriding the model on this point. That’s because the equity trend is now negative and it seems likely that an equity bear market is now underway. That’s subjective, but I’m sticking with it.
An exhausted bull market for equities
This is a tired old equity bull market that rides on high valuations, especially for companies that have embraced the modern age. The 200-day moving average for global equities is now negative; credit spreads are widening; margin debt is contracting; and economic forecasts are cooling. Those are market factors, but there’s the real world too.
China trade; Brexit (the great opportunity); Italy; Mexico; France, France and more France. Putting this together, it is hard to imagine equities doing well over the next couple of years, and particularly in the developed world. For gold to beat equities has become an undemanding task.
Looking at gold relative to the S&P 500, we’ve witnessed gold fall by 75% relative to the S&P 500 (capital return) since the 2011 peak, which is a long way; and back to 2006 levels.
Gold relative to the S&P 500 with a 35-month moving average since 1950 (Source: Bloomberg)
Notice how the gold-to-S&P chart spends more of its time going down, which is as it should be, because equities are expected to deliver a return of inflation plus 6.5% per annum over the long term, whereas gold is only expected to deliver a real return of 0%. Gold’s job is to be a reliable store of value – and sometimes, zero is the best deal in town.
By delivering a zero real-return over time, that periodically means a price surge followed by a prolonged period of catch-down. Gold soared in the 1970s during a period of high inflation; it then spent the next two decades sliding back down to earth as inflation disappeared. Gold went on to do well in the noughties as real interest rates fell. And just like the 1970s, gold was too cheap to begin with, meaning the early surge was a catch-up.
Talk of monetary tightening in 2013 killed the gold price, and the subsequent unwinding of quantitative easing and interest-rate hikes has kept a lid on the price ever since. Yet, as this tightening cycle draws to a close, the gold price will be free to climb. And even if we must wait a while longer, there is light at the end of the tunnel.
For these reasons, I believe gold is well-placed to establish an uptrend versus equities. And with that third point in place, it’s three out of three. I have upgraded the gold barometer from “becalmed” to “bull market”, for the first time since 2012.
Better times lie ahead for the gold market...
- Source, Money Week, Read More Here
