Gold futures declined yesterday, initially thanks to a stronger dollar; however, a reversal in the greenback saw precious metals close well off the worst levels of the day. Gold futures declined 0.34% on the day.
It is clear that the precious metals market, specifically gold, has gotten crushed since the election, and there are a lot of investors wondering if now is the time to buy.
The simple answer is, “Not yet.”
Longer term, given The Sevens Report is positive on inflation, gold will rally again, but The Sevens Report needs to see higher inflation to offset two strong headwinds on gold near term.
First, a lot of this reversal was thanks to the unexpected election outcome that initiated the rally in the dollar to multi-year highs. When the dollar rallies hard, gold will fall every time. Going forward, the dollar rally will need to level off in order for the gold market to materially stabilize. The Sevens Report long-term upside target for the Dollar Index is between 106 and 107, so until The Sevens Report see those levels (or signs of a significant reversal in the greenback confirmed by some sort of fundamental altering event) the outlook for gold is not very bright… until The Sevens Report sees an acceleration in inflation.
Aside from the dollar, the real interest rate (nominal interest rates minus the inflation rate) has offered the best fundamental read for the gold market.
In the wake of the election, inflation expectations did not materially change; however, nominal interest rates surged in a big way. That resulted in a spike in real interest rates, and that’s very bearish for gold.
When inflation accelerates, and starts to outpace rising interest rates again, The Sevens Report will see gold as an attractive investment like it did earlier this year.
Remember, Treasuries were trading sideways this summer and inflation was firming, which led to declining real interest rates (which is bullish gold). But if the trend in interest rates is materially higher and inflation remains well contained, gold will likely fall further.
To be clear, gold and the dollar can rally together, just not while the dollar is moving as swiftly as it did post-election. If inflation shows signs of getting out of hand, and the Fed is perceived to be “behind the curve,” then gold can rally (because real interest rates will decline as inflation accelerates despite a rally in the buck).
Technically speaking, the trend is lower in gold, and there is not much support before the $1130-$1140 area. To the upside, retracements to resistance at either $1210 or $1225 should be normal throwbacks in an otherwise downward trending market.
Bottom line, gold is not a buy now. But as market conditions settle, The Sevens Report will look for the two key components necessary for a new rally in gold… the dollar leveling off and real inflation rates showing signs of declining as actual inflation edges higher.
Oil futures got caught up in “risk trading” during the election drama. Energy futures sold off hard with global stocks overnight Tuesday and then surged higher as money poured back into risk assets on Wednesday. That was about the extent of the effect that Trump had on the energy markets at least so far.
Tyler Richey, Co-Editor of the Sevens Report, said “Policy wise, it isn’t exactly clear yet how a Trump administration will affect energy markets, however it is fairly safe to assume that he will be pro-US oil and that could tighten or even reverse the arbitrage spread with the global benchmark Brent contract which trades at a premium to our domestic WTI contract.”
Market focus returned to the bearish fundamentals in the back half of the week once the election drama subsided. Most notably, doubts about OPEC reaching any sort of production deal later this month has become a notable headwind. OPEC members have been successful in jawboning the market higher in recent months but traders are beginning to get skeptical as they are saying one thing (“we are going to cut”) and doing another (pumping at or near record highs).
Additionally, the US fundamental backdrop is bearish as production has stabilized above 8M b/d in the lower 48 as rig counts continue to climb while stockpiles are near all-time highs.
Richey, “Bottom line, the trend in oil prices is currently lower and the fundamentals are decidedly bearish for the medium term, leaving the path of least resistance lower as we approach the end of the year.”
Volatility in the gold market has been extreme this week as the initial flight-to-safety reaction to the election results spurred a huge rally but money flows quickly turned risk-on and gold has since collapsed.
Heading into the election there were a lot of investors piling into gold as a hedge and while that position worked overnight on Tuesday, it has since become a losing bet and you are seeing longs get squeezed out as they cut losses.
Looking ahead, this price action in gold is rather discouraging for the bulls however we are not throwing in the towel on our long call just yet as we still see the risk reward of being long gold here as favorable. On the charts, support holding between $1200 and $1220 is now critical for the health of the relatively young uptrend in gold (technicals turned bullish in April).
Silver has a split personality in that it can trade in sympathy with both the industrials like copper or precious varieties like gold. Over the last few days, silver has outperformed gold as futures rallied in sympathy with the historic squeeze in copper futures in the wake of the election. But, the copper surge is showing signs of exhaustion this morning and the new lows in gold are starting to weigh on the dual-purpose silver contracts.
Stocks saw their biggest drop since Brexit early this morning while currency and bond markets made historic moves overnight, and I have no doubt that clients are calling you asking:
“What do we do?”
I basically didn’t sleep last night making sure we could help our subscribers answer that question when clients called today.
So, in today’s paid edition of The Sevens Report (which was delivered shortly after 7 a.m.), we explained:
1. Whether the Trump victory is a “Lehman Moment” that requires massive de-risking across asset classes (We do not think so at this point).
2. What key index and level we are watching to tell us when this might become a potential “Lehman moment” and require much more defensive positioning.
3. What we would consider buying TODAY amid the volatility.
4. What specific level we would consider buying this dip in stocks based on valuations (it’s lower than current levels).
I never like to see markets down like this, but I am happy that our “Election Preview” detailed, specifically, what would happen if we got a surprise Trump victory, and so far, much of our preview has been spot on.
So, despite the hysteria in the financial media today, our subscribers were not blindsided by that result and I’m sure that’s helping them today in conversations with their clients.
Going forward, everyone wants to know how this will affect markets and the amount of uncertainty regarding a Trump administration will be significant.
We will cut through that noise for our subscribers and deliver the information they need to successfully navigate this environment.
While the financial media (both TV and online) is going to be hysterical for the next few days about the impacts of this historic vote, there are three key issues we need to watch to tell us what to do from an allocation standpoint:
• Does the uncertainty of a Trump victory paralyze the markets for the rest of 2016?
• Will the Fed delay a rate hike due to stock market turmoil?
• Will the selloff in Treasuries accelerate and send the 10 year yield to and through 2%?
If the answers to all three of these questions are “No,” then the market impact of this will be temporary -and we will be watching each of these issues for our subscribers and will alert them to any changes.
That’s how we will help them cut through the noise and navigate this market.
Mornings like today are why I created The Sevens Report, so that our subscribers can turn market volatility into an opportunity to demonstrate their value to their clients, and in doing so increase AUM via more allocations and more referrals.
While some advisors are avoiding client calls or searching for something to tell nervous clients, our subscribers know what is driving the markets and are using this as an opportunity to show their clients they are in control of the situation.
The most important thing for financial advisors to do in this volatile
environment is to show clients that they:
• Know what is going on in markets,
• Are in control of client portfolios, and
• Know what to expect next.
Because if you don’t, you will lose those clients to someone who does.
Today will be a difficult day in the markets and we want to make sure people have a clear understanding of what’s actually driving markets and what the key catalysts are going forward. We’ve included an excerpt of our post-election research as a courtesy below. We hope it makes your day a bit easier.
What the Election Means for Markets: Sevens Key Takeaways.
The events of last night largely met our “Ugly” scenario, and as such we saw a “Brexit-style” reaction as markets traded sharply lower overnight, although notably they are well off those lows this morning.
From an analysis stand point I want to focus on immediate takeaways and trying to answer questions you may have (or questions you may get from your clients regarding this event):
Takeaway 1: The Trump victory is not a bearish game changer for markets, at least not yet. From a macro standpoint, we are seeing that “sell first/ask questions later” reaction from markets that we predicted. But, despite the reaction we do not view the Trump victory as a material, bearish gamechanger and we are not reducing medium/longer term allocations to stocks on the news or market reaction.
I say that for one main reason: Beyond the short term, with total control of government, Trump will be able to enact potential pro-growth policies and the new US government will be business friendly, which longer term is a positive.
Takeaway 2: Does the Trump win imperil a yearend rally in stocks? Yes. To put it lightly, a lot of policy uncertainty needs to be clarified over the coming months. So, from a practical standpoint, that uncertainty means a material year-end rally is unlikely. While some analysts are calling for a Brexit-style bounce following this initial selling, as the market digests Trumps pro-growth policies, we do not see that happening this year (i.e. the remainder of 2016) as there are simply too many unknowns about his policies and the makeup of his administration.
From a broad level, until the market knows more, stocks will have a very hard time rallying materially.
Takeaway 3: The Fed may not hike rates in December. Treasuries are down sharply this morning but the longer-term decline in bonds has potentially stalled for 2016, as we don’t know whether the Fed will hike rates in December given this political upset and market fallout. We are not adding to inverse bond positions although longer term the trends of inflation and growth should continue to push yields higher.
Takeaway 4: Gold is a clear winner, and will likely rally until there is more clarity on Trump’s policies, and that’s one of the clear winners of this outcome.
Takeaway 5: Make Sure You Have a Tactical Hedge in Case this Market Rolls Over. Restricted for Subscribers.
Takeaway 6: Sector Winners and Losers:
Restricted for subscribers.
Takeaway 7: Which Two Sector ETFs We Are Buying Today. Restricted for Subscribers.
Takeaway 8: What Makes This A Bearish Game Changer.
Restricted for Subscribers.
Having daily, accurate, up to date information on the key leading indicators for this market will be the only way to successfully navigate this environment, and that is what we are going to do for our paid subscribers.
If you are not confident that your brokerage supplied research or subscription research will help you successfully navigate his environment, then please consider a subscription to The Sevens Report. We will make sure our paid subscribers have the independent and timely analysis they need to turn the coming volatility into an opportunity to strengthen client relationships and grow their businesses!
Given the market volatility, we are extending a limited time, special offer to new subscribers of our full, daily report that we call our “2-week grace period.”
If you subscribe to The 7:00’s Report today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.
Increased Market Volatility Will Be an Opportunity for the Informed Advisor and Investor
We aren’t market bears, but we said consistently that things were going to be volatile in 2016 and we were right!
As we enter this critical stretch into year end, the advisor who can confidently and directly tell their nervous clients what’s happening with the markets and why stocks are up or down, and what the outlook is beyond the near term (without having to call them back) will be able to retain more clients and close more prospects.
We view volatility as a prime opportunity to help our paying subscribers grow their books of business and outperform markets by making sure that every trading day they know:
1) What’s driving markets
2) What it means for all asset classes, and
3) What to do with client portfolios
We monitor just about every market on the globe, break down complex topics, tell you what you need to know, and give you ETFs and single stocks that can both outperform the market and protect client portfolios.
I’m not pointing this out because I’m implying we get everything right.
But we have gotten the market right so far in 2016 and it has helped our subscribers outperform their competition and strengthen their relationships with their clients.
That’s our job. Each and every trading day.
And, we are good at it.
We watch all asset classes to generate clues and insight into the near-term direction of the markets, but our most important job is to remain vigilant to the next decline.
While we spend a lot of time trying to identify what’s really driving markets so our clients can be properly positioned, we also spend a lot of time identifying tactical, macro based, fundamental opportunities that can help our clients outperform.
If you want research that comes with no long term commitment, yet provides independent, value added, plain English analysis of complex macro topics, click the button below to begin your subscription today.
Finally, everything in business is a trade-off between capital and returns.
Editor of The Sevens Report
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