Metals Suffer

In general, our political philosophies are independent and don’t fit neatly within the “Right / Left” or “Republican / Democrat” paradigm. That is often portrayed by the mainstream media as the only legitimate choice. On occasion, we will comment in these posts on the political world when it directly relates to our work in the capital markets and precious metals. It is increasingly certain that the accelerating parabolic advance in the US stock market is siphoning off liquidity. This would otherwise be flowing to other world markets, such as precious metals and commodities. Just witness the graph at right, showing a nearly 1:1 inverse relationship between the stock market and gold over the past six months as the parabola has gained momentum:

Relationship between the stock market and gold.

 

The US stock market is overvalued by most historical fundamental metrics including a near-record low dividend yield and a record high price-to-sales ratio. It is now just beginning to enter a parabolic curve trajectory. This type of curve is the hallmark of an asset class which is reaching unsustainable momentum and approaching “bubble/mania” psychology.

The final top could be some time away still. The parabolic curve is showing us the unsustainable nature of the advance ahead of time.  Note below how the market has been advancing for nearly nine years higher (magenta color). It is actually breaking upward and now accelerating even higher (red callout). This is the visual perspective of the beginning stages of a linear market transitioning to parabolic:

Market transitioning.

 

 

Trump Urges Investors to Buy Stocks

President Trump added fuel to the fire by posting the following comment publicly to his 54.2 million followers on Twitter:

 

What is astonishing about Trump’s comment is that this is the first time in memory that a President has actively been “cheerleading” a stock market bubble higher. In essence, we have the US commander-in-chief actively encouraging the common person to chase the stock market higher. Again, this, for an asset class that is already 300% higher already since the 2009 lows. A value proposition this is not.

Politicians Cause Market Imbalances

Throughout history, when politicians try to either push an asset class artificially higher (i.e. the stock market now) or suppress an asset class lower (i.e. gold or gasoline prices in the early 1970’s) they universally cause more market imbalances and an eventual more dramatic overshoot in the opposite direction than if they had left the market alone from the start.

Markets must eventually return to match their fundamental values. President Trump in his heralding of the stock market is causing the average investor in the United States to pour even more capital into an over-valued asset class.

When greed turns to fear as the last of the buyers eventually buy at the top of the bubble in US stocks, the reverse dynamic as is now present will begin to exert itself. Selling will beget selling. All those who bought on Trump’s cheerleading and near-guarantee of higher stock prices will turn to distrust their leader. This will cause a more violent decline than would have occurred had Trump not began publicly promoting stocks.

 

Takeaway on Trump, the Stock Market, and Gold

No matter what political party one leans toward, the lesson from history is that politicians should stay out of the capital market advisory business. Politicians do not create wealth – they can only redistribute it.  All such distortions eventually require an even more dramatic reversion to the mean when the psychology of the masses finally turns.

If the recent inverse correlation between stocks and gold holds, then precious metals stand to be a primary beneficiary when the stock market advance reaches its terminal stage.


Christopher Aaron
Bullion Exchanges Market Analyst

Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency. 

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is a third party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.

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