The markets have turned in a strange performance over the past several weeks. The numbers on the economy came in weaker than expected with GDP down -.1% in April. Unlike other recoveries, spending growth has decelerated. Each year it takes a step down. This is not the way it should be. In all past recoveries, spending growth increased as the economy grew. Discretionary spending was up but 90% of that was due to inflation, especially in food and energy. Consumers are being forced to spend more. Our US deficit is running at about $17.3 trillion. The US Federal Reserve’s Balance Sheet has grown to $4.9 trillion. Surprisingly, the US stock market made a new all time high in the Dow and S & P. Gold, on the other hand, fell to its lowest level in the past 15 weeks.
This activity has the pundits scratching there heads. The fundamentals for gold look good. China and India are buying more gold than is being mined. The World Gold Council reported that China bought 1,132 tons last year, with demand growing at 20% a year. One reason for China’s stepped up purchases is that they no longer want to accumulate foreign reserves in US dollars. China issued this statement: “It is no longer in China’s favor to accumulate foreign excess reserves.” JP Morgan had been short gold throughout 2013 with a trading profit of $3 billion. Now, for the first time, JP Morgan has turned bullish.
Gold had been going sideways for more than three months. What often happens is that over time stop loss orders accumulate under the market. Traders are aware of where these stops are. Then, suddenly, a big sell order comes on the market and wipes out all the longs in on fell swoop. This is what happened on Tuesday May 27, 2014. A sell order of 500 million ounces drove the market down $26.20, with the market continuing down for the rest of the week. Friday’s spot close was $1250.50.
This past week’s price action broke through the trading range support on the downside. This often signals further weakness. Looking at past trading we have a double bottom already formed. From a technical perspective we could have a triple bottom or the price can decline to new lows. However, this could be a bear trap with prices holding near the lows and a turn around to the upside. Analysts are divided on this question. Some hold that the bottom is in for the year, while others contend that we are headed to new lows.
For investors, when we have this kind of price action, it is best to stand aside and let the market forces play out. Guessing on which way prices are headed is a fool’s game.
Some analysts advise that we watch the price of silver. In past market turns, silver has led the way either up or down. Another market to watch is the oil sector. Often gold and oil run in tandem. Oil has already started a bull move from a recent low of $98.00 per barrel for WTI crude to last week’s high of $104.00 per barrel. Gas at the pump is at or near $4.00 per gallon.
Investors must remain cautious be it in the stock market or commodities. With stocks at all time highs, the risk of holding equities becomes greater as the weeks unfold.