Is The Tipping Point
Just Ahead? The global bond sell-off is accelerating today, and this doesn’t bode well for stocks.
But what will it mean for gold? Dear Fellow Investor, Some very respected analysts are saying there’s trouble ahead for the stock market. Today the market may be telling us that the trouble has already arrived. You know that the Federal Reserve seems dead-set on continuing to normalize interest rates and their balance sheet, announcing that they’ll start rolling off their assets before the end of the year.
And you’re probably aware that European Central Bank President Mario Draghi sparked a firestorm last week by noting in a speech that the central bank could start tightening as growth strengthened in Europe.
The result: Bond investors suddenly realized that central banks weren’t going to have their backs any longer, and they started selling.
Today, the sell-off has accelerated, spreading across the global sovereign debt market.
Importantly, the dollar has taken a nose-dive and U.S. stock indices are rolling over.
So is this the signal that the long bull market in U.S. stocks is over?
Some are saying it’s unavoidable. No Escape Just today, legendary market technician Tom McClellan has warned that “the great bull market in stock prices from the 2009 low is in its last stages.”
Why? Because the yield spread between the German 10-year bond and the 10-year U.S. Treasury bond is narrowing. And since the 1980s, a peak in this spread has signaled a peak in U.S. equities. Two notable peaks in this spread occurred in 2000 and 2007 — preceding major sell-offs in the stock market. McClellan notes that, although this signal has been very reliable since the 1980s, it’s often early.
But another analyst says the sell-off is not only inevitable, but perhaps also imminent if the Fed continues along its present course.
That analyst is our friend Peter Boockvar (Chief Market Analyst for the Lindsey Group and popular speaker at our New Orleans Investment Conference). Peter recently summarized the situation for his readers: “Listening to Fed members Stanley Fischer (‘In equity markets, P/E ratios now stand in the top quintiles of their historical distributions, while corporate bond spreads are near their post crisis lows. Prices of commercial real estate have grown faster than rents for some time’) and John Williams (‘there seems to be a priced to perfection attitude out there and that the stock market rally seems to be running very much on fumes.’) express worries about high valuations yesterday is just truly amazing.
“Now they are worried about financial stability? What did they think would happen when rates sit at or near zero for almost a decade and their balance sheet quintupled? Of course valuations get excessive and yesterday’s comments just typifies how backward looking they typically are.
“That, combined with their desire to ramp up the tightening cycle in the 9th year of an economic expansion should be a warning writ large that central bankers remain the biggest risk to asset prices.” Note: Golden Opportunities readers can get a deep discount on a subscription to Peter’s daily The Boock Report newsletter — and get essentially the same analyses and advice that the biggest institutions on Wall Street are getting for a fraction of the cost — by clicking here.)
Simply put, Peter is saying the Fed cannot escape the trick box it has created through years of unprecedented money and debt creation. And unless they act now, investors won’t be able to escape the record-high stock market bubble that has thus been created. But What About Gold? The stock market hates uncertainty.
But gold loves it.
Considering the escalating crisis with North Korea, the turmoil in the global bond market and the drop in the U.S. dollar, you’d expect gold to be surging higher.
But it hasn’t happened…yet. Gold is essentially flat today as investors try to figure out the implications of rising rates simultaneous with a falling dollar.
However, I don’t think this pause in gold will last long.
For one thing, investors are currently focused on the supposedly bearish effect that rising interest rates will have on gold. But they’re ignoring the fact that gold has posted some of its strongest gains precisely when rates have been rising.
Moreover, we’ve seen that the big bond firestorm is throwing cold water on the stock bull market. If/when this bull market falters, there will be an avalanche of money flowing into the relatively tiny gold market. Regardless, smart investors need to hedge themselves with gold — and select, high-quality mining stocks. As I’ve noted in recent issues, this summertime lull in the market is the buying season for metals and mining shares. It’s the time when you can put the market cycle to your advantage and pick up the best companies at bargain prices.
Take advantage of this opportunity while it lasts. All the best, 
Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference |