Stocks surged yesterday. Gold sold off. And more “green shoots” appeared in the form of better than expected consumer confidence figures. Crisis Strategy Alert editor James Dale Davidson reckons the “green shoots” of recovery proposition are overbought. He also reckons gold is still the asset of choice to hold as the great deleveraging continues.
James emailed Notes with his thoughts on gold and stocks yesterday. We think he’s bang on the money with his forecast.
I had expected a sucker’s rally into May. In the last two epic credit cycle deleveraging events – in 1873 and 1929 – both experienced a reflex rally after the autumn crash that lasted through the 20th month after the peak, which is to say, through May. If you check the calendar, we could be following the same pattern.
The question, of course, is whether we continue to follow past patterns, or whether the massive intervention (quantitative easing) orchestrated by the US and British governments will break the pattern.
Here I assume that if the intervention proves successful it will trigger a lot of inflation in a hurry. Once ignited, it would seem likely to stay with us (rather than merely push gold to a spike only to then peter out to the $700 region). On the other hand, if the intervention proves futile, as I expect, this should be equally or more bullish for gold, which has always rallied in real terms in post-bubble contractions.
My guess is that we’re pretty close to seeing whether “this time is different.” Both silver and gold are overbought, and I think they are likely to correct over the next few weeks. I also suspect that the stock market in general is going to disappoint as well. All the CNBC types who are now pounding the drums over the green shoots are soon going to be back on their hands and knees with magnifying glasses.
If the pattern holds, after a near-term pullback in stocks and metals, stocks will head south for a long dormant period, and gold and gold stocks will experience epic rallies that will last longer than Gordon Brown’s government and Obama’s popularity.
I see the market here as behaving as if it were motivated to cause the maximum possible losses for both bulls and bears. It rotates from convincing investors that their world is unraveling to reassuring them that nothing has changed. Then it turns around and saws the legs off of everyone who takes its most recent lesson to heart. You can’t safely hold long or stay short.
History may be ultimately unknowable. But research convinces me that a pattern recurs in post-bubble contractions. Time and again, gold has been the asset of choice. I can only project that it will be more so than ever this time, as history’s greatest deleveraging unfolds.