In both the stock market and the precious metals markets, investors face a paralyzing collection of bearish and bullish evidence. Everyone is looking for the asset that will emerge as the winner in this new era of finance.
- Gold continues to show some weakness following its recent drop. It looks like it might be headed to retest the March lows, but several indicators are signaling a bullish reversal when or before it gets there.
- The stock market is as white-hot as the housing market, but some money managers worry equity valuations are in a dangerous position. Stocks look priced to perfection, meaning any shock to the system could trigger a major correction.
- The next couple of weeks will provide some excellent entry points for gold investors. Precious metals are providing a rare pocket of value in today’s extremely expensive financial ecosystem.
More room to fall?
Gold has not made any large moves since the $100 sell-off on June 16th and 17th. The price did put in a lower low this week after dropping below the 50% correction line, which indicates the price might have further to drop. We are targeting the .618 Fibonacci retracement line, the location of gold’s recent double bottom in March. The .618 Fib lies at $1,691.
Chart patterns tell a different story
There are several bullish indicators that may delay gold’s third visit to the .618 Fib line (or cancel it altogether). The purple line on the chart below measures gold’s Relative Strength Index (RSI). RSI is a momentum indicator used to analyze when assets are overvalued or undervalued. When RSI drops below the light purple range, like this week, the indicator suggests that gold is undervalued. Low values on the Relative Strength Index make for strong entry points.
Gold’s price movement in 2021 has created a reverse head and shoulders pattern, which has held steady since the recent drop. A reverse head and shoulders pattern typically indicates a bullish reversal.
The S&P 500 climbed 14% in the first two quarters of 2021, and the Dow Jones Industrial Average is up 13%. Both indexes have posted gains for 5 consecutive quarters, following the massive COVID-19 drop in Q1, 2020.
Economic recovery in the United States appears to be accelerating alongside rising inflation. Corporate earnings are strong, and S&P 500 executives are generally conveying a positive outlook for future growth. However, the strange market dynamics supporting the post-COVID-19 economy are troubling to many money managers. Some believe the market has already priced in expectations of exceptional growth. If these expectations fail to pan out, the market will suddenly appear extremely overpriced. Any shock to the system could have an outsized impact on equity valuations.
After rising consistently from August 2020 to April 2021, the yield on the 10-year treasury has been on a slight decline for the past 3 months. The 10-year Treasury yield is important because it serves as a benchmark for the cost of borrowing money, such as interest rates on mortgages. The recent decline suggests that investors are less confident in long-term economic growth than they were a few months ago.
Market participants’ eyes will all be on inflation. If the Consumer Price Index pulls back from its recent highs and stabilizes over the next year, all is well. If inflation remains elevated, stemming from continued supply chain disruptions, labor shortages, and of course, the massive amount of government-created liquidity that has been injected into the economy, the Fed could be forced to raise interest rates sooner than expected. This is one of the biggest threats to a stock market trading at all-time highs.
Guessing the market is impossible; building a robust and secure portfolio is not. Gold is positioned to perform extremely well as the world of finance enters a new era. During times of uncertainty, diversification is the name of the game.
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As always, thank you so much for reading – and happy investing!
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