With the first week’s trading after the Labor Day holiday now behind us we can begin to get some idea as to whether the end of the U.S. summer holiday has proven to be an inflection point for either equities or precious metals as often appears to have been the case in previous years. The jury is still out! Gold seems to be having trouble breaking up through resistance at $1,950 and silver at the $27 level. However both ended the past week little changed on their levels of a week earlier, which is something of a disappointment for precious metals bulls. General equities have been down and up several times, and ended the week comfortably below their early September levels, but not sufficiently so yet to suggest the oft-predicted major market crash is under way - or even imminent.
All three major stock indexes recorded heavy falls when trading resumed on Tuesday, but partly recovered on Wednesday, fell again Thursday and the Dow and S&P 500 both recorded small (in percentage terms) upticks again on Friday, although the previously high-flying NASDAQ continued to lose a little ground that day. So overall it may yet be another week or two before any discernible consistent major trend in general equities becomes apparent.
Equities, gold and silver all opened up significantly at the beginning of the current week as U.S. markets opened, and the precious metals may have even broken up through the previously mentioned resistance levels. Again whether this signifies a trend in either market sector remains to be seen. With the dollar and oil falling that could prove positive for the precious metals and other commodities, but equities are treading something of an uncertain path in our opinion. There is a U.S. Fed FOMC meeting on Tuesday and Wednesday this week and what transpires then is likely to set the pattern for the month ahead. The next such meeting will not take place until immediately after the Presidential election, the result of which will likely overshadow the FOMC event – and even make what is decided then pretty much irrelevant in the short term.
The Presidential election – now less than 2 months away – could well boost both gold and silver prices whichever way it goes. Gold tends to thrive on uncertainty, while silver’s price pattern tends to follow that of gold, but in a more extreme manner, and there will be plenty of uncertainty both ahead of, and after, the actual election date. Neither Donald Trump, nor Joe Biden, seem to be particularly supportive of a stronger dollar which, if it were to occur, would normally lead to weaker precious metals prices.
The U.S. is still seeing a COVID-related unemployment total of over 14 million persons (although this official figure almost certainly understates the true unemployment level) and with the U.S. summer drawing to a close this is unlikely to come down much further, if at all. Indeed any early signs of an employment resurgence are already beginning to fade away as federal and state support for the particularly hard-hit sectors of the economy begins to fall away and layoffs increase. The crisis may well get worse before it starts to get better and once this realization hits the investment sector, equities could well fall sharply over the next couple of months. As this takes place we would likely see investors push into traditional safe havens like gold – with silver riding on gold’s coattails as it is wont to do.
In a recent article on the UK’s Sharps Pixley website entitled ‘Watch gold and buy silver’, published at the beginning of the current month, we recognized that gold is the true driver of the precious metals market. However, silver’s higher volatility means that its likely percentage gains would be the greater in a rising gold price scenario. Silver investment does carry the higher risk though as, as well as its tendency to rise faster than gold when the latter is rising, it also falls faster and further if gold does not perform as hoped. Gold bullion thus always remains the safer investment choice, but silver is potentially the gambler’s call as the bigger potential gainer in percentage terms – as long as gold performs of course. But both are almost certainly better choices than the currently overvalued general equities sector which has been showing recent strength – at least up until last month - despite the U.S. economy being in the throes of one of the biggest downturns ever seen.
Gold and silver’s performance year to date in U.S. dollar terms, provides a great pointer to precious metals strength in the current economic environment, Gold is up around 28% and silver a massive 50%. Both have performed far better than equities so far this year, with the Dow down 4%, the S&P 500 up 2.6% and the best stock performer, the NASDAQ, with its focus on tech stocks, up 19.4%. But these equity indexes are all being buoyed up by a few ultra-high flying tech stocks, which are mostly beginning to look a little precarious, reminiscent of the tech stock bubble, and crash, of 20 years ago.
Some big guns are in denial over the likelihood of a tech stock crash, but others see warning signs – particularly for stocks like Tesla, Facebook, Netflix, E-Bay, Uber. Lyft etc. Even Apple – currently the company with the world’s highest market capitalization, is beginning to look a little overstretched following its recent stock split, although some tech giants do seem to be the biggest beneficiaries of the COVID-19 virus effect. But even among these, Amazon for example, which has seen huge growth in online business worldwide, is facing some substantially enhanced costs as a result, which will likely eat into its bottom line and could prove damaging long term if its market growth stutters.
We continue to see U.S. equities as vulnerable to a crash of monumental proportions. As Stan Druckenmiller is recently reported as saying “Right now, we’re in an absolute raging mania. We’ve got commentators encouraging companies to do stock splits. Companies then go up 50%, 30%, 40% on stock splits. That brings no value, but the stocks go up.” Other top hedge fund and investment company managers are staying out of the general equities market in anticipation of a crash occurring sooner rather than later, and even gold non-believer Warren Buffett’s Berkshire Hathaway has been dumping banking stocks and buying mega-gold miner Barrick Gold. Take note! These are some of the most successful guys on the investment scene. If equities collapse stocks could lose many tens of percents. But gold will probably remain the best protection for your money – and if gold continues to do well silver will too.
Consider the above our ongoing advice re. wealth protection. Gold has served well as a wealth protector since the dawn of time and, in our view, it will continue thus. It may not have a smooth run – things seldom do – but in the long term it will continue to stand you in good stead. In the words of Michael Lewitt of The Credit Strategist fame “Buy gold and protect yourselves”. We doubt you’ll go far wrong by following that advice.