‘Trade Of The Century’: Buy Gold, Sell Stocks- Crescat Capital

Release Date:  Friday, March 22, 2019

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Gold and Silver Prices

Gold had its third consecutive weekly gain and its best week in nearly two months following weak economic data that increased global growth worries.

"'There is some safe demand that has surfaced,' said Jim Wyckoff, senior analyst at Kitco Metals.

"'The U.S. Federal Reserve suggested U.S. economic growth was slowing, which has spilled over into notions that the rest of the world economy might be experiencing slower growth. That was highlighted by the PMI data out of the European Union, auguring for some trepidation in the world's stock markets.'

Businesses across the euro zone performed much worse than expected this month... European stocks suffered after the weak data, while U.S. stocks opened lower.

"'Price action in gold continues to lend strength to our view that expected data deterioration will help spark a gold rally as interest rates continue to fall in the context of a slowing global economy,' analysts at TD Securities wrote in a note.

"Earlier this week, the Fed brought its three-year drive to tighten monetary policy to an abrupt end, abandoning projections for any interest rate hikes this year. Lower interest rates reduce the opportunity cost of holding non-yielding gold and weigh on the dollar.

"Gold prices rose to their highest since Feb. 28 on Thursday at $1,320.22. Despite paring some of those gains, they were still on track for a third straight weekly gain, up about 1 percent so far.

"'Gold could not break above $1,320 on the upside and saw a correction. The current trading range seems to be between $1,305-$1,320,' said Afshin Nabavi, senior vice president at MKS SA. 'With the geopolitical and the (uncertain) Brexit situation, we may still be heading higher.'" ("Gold rises as growth concerns dent risk appetite," Reuters, CNBC, 03/22/19.)

Gold ended the week up $11.10, closing at $1,313.40. Silver ended the week up $0.09, closing at $15.40.

'Trade Of The Century': Buy Gold, Sell Stocks- Crescat Capital - Golubova

A top performing hedge fund advices owning gold right now as it projects a recession and a bear market in stocks this year.

"Buy gold and sell stocks is the 'trade of the century' advice that one of the best-performing hedge funds of 2018 is giving out to its clients.

"'We believe that long gold in CNY terms versus short global equities today could be the macro trade of the century!' according to Crescat Capital LLC.

"One of the main reasons to own gold right now is the rising risk of a potential meltdown in equities, Crescat chief investment officer Kevin Smith and global macro analyst Tavi Costa wrote in a note published on Friday.

"The Denver-based firm is projecting a recession and the start of a bear market in stocks sometime this year.

"'Soon the buy-the-dip mentality and bull-market greed will turn to fear. Selling will beget more selling. That's how bear markets work. There is so much more ahead to profit from the short side of the market,' Smith and Costa stated.

"Recession could be a lot closer than the markets are anticipating at the moment, the note pointed out.

"Crescat's macro models show that the expansion is about to turn into a recession within the next several quarters based on an abundance of indicators," Smith and Costa said. "'How do we get to the recession? The U.S. stock market and corporate credit bubble must burst first. That is how the business cycle works. It started in the fourth quarter, but that was only the beginning.'

"The analysts also cited many 'insiders' heavily selling stocks in early 2019, while the majority of investors were still in the risk-on buying mode.

"And the signs pointing to a recession are already very visible, according to the firm.

"'The U.S. twin budget and trade deficit is diverging from the S&P 500 signaling the likely peak of the stock market and business cycle on the heels of the tax cut. U.S. hard economic data is showing a sharp deterioration in GDP in the current quarter ... The percentage of inversions in the US Treasury yield curve is now close to 45% by our model. The last two times the credit markets had such a high distortion, asset bubbles began to fall apart shortly thereafter,' Smith and Costa wrote.

"Crescat Capital LLC manages about $50 million, with a record of outperforming the S&P 500 Index. In 2018, the company's Global Macro Fund saw a return of 41%." ("'Trade Of The Century': Buy Gold, Sell Stocks- Crescat Capital," Anna Golubova, Kitco News, 03/21/19.)

Is Gold Back in a Bull Market - Rashotte

Several analysts and market watchers speculate gold to go bull very soon due to the current global economy.

"Although many market watchers believe that gold has not seen a bull market since 2011, others argue that rising prices supported by ongoing geopolitical issues and a pause in Fed hikes are signs that the yellow metal is currently entering a new bull market. In order to truly understand a gold bull market, it is important to recognize the contributing factors and the ways in which it affects the economy as a whole.

What is a gold bull market?

"Although a bull market typically refers to the stock market, it can be applied to anything that is traded, such as precious metals.

"While it is common for bull markets to appear when the economy is strengthening or already strong, the opposite is true for a gold bull market. Due to the fact that the yellow metal is a safe haven for investors, it flourishes when the economy is on shaky ground and the US dollar is struggling - two factors that send investors to seek safety within the market.

"When there is optimism, investor confidence and price increases surrounding the gold space, and generally the precious metals sector as a whole, it usually means that those things do not fully exist within the economy on a grand scale.

"Additionally, there are psychological price levels that indicate when the yellow metal has begun or is about to begin a bull market. For some time, that number has been over US$1,350 per ounce. 

"Finally, there are two types of bull markets for gold. The first is a long-term bull market, in which gold rallies and analysts predict that the rally will last for a year or more. The other is a short-term bull. In this case, yellow metal prices pickup but market insiders don't believe that the increase will last longer than a few months, so they predict it will be a shorter phase and not a full, official bull market.

What factors create a bull market for gold?

"In today's global economic landscape, there are currently six common factors that create a bull market for gold.
The first, and perhaps the largest influence on the precious metal, is monetary policy, which is controlled by the US Federal Reserve.

"When the Fed implements interest rate hikes, gold tends to dip as a response... On the flipside, if the FOMC hints that rates will remain steady, gold prices generally rise due to the fact that the opportunity cost of forgoing interest-based assets instead for gold remains low.

"The second gold bull market driver is, as previously noted, economic data. Economic data, such as the jobs reports, wage data, manufacturing data and broader-based data such as GDP growth, influence the Federal Reserve's monetary policy decisions, which can in turn affect gold prices.

"Supply and demand for gold is a third common factor that influences a bull market. Essentially, an increase in gold demand paired with constrained or low supply often creates an upswing in the precious metal's price. Conversely, oversupply of the yellow metal or a lack of demand will inevitably negatively affect the overall price of gold.

"Inflation, which is closely related to interest rates, is a fourth common driver of gold bull markets. Higher levels of inflation tend to push gold prices up, whereas lower levels of inflation or deflation weigh on gold, causing in to dip in value.

"Finally, currency movements and electronic-traded funds (ETFs) also have a hand in which way the gold market will sway. The movement of currencies - very specifically the US dollar, has the power to affect the price of gold either negatively or positively. When the greenback is up, gold is down and therefore it becomes harder to create a bull market for the yellow metal. However, when the US dollar is down, the price goes up as investors seek the metal as a safe haven and become far more likely to buy gold. As previously mentioned, climbing prices of gold bode well for a bull market.

How do stock market prices affect a gold bull market?

"Like with a strong economy or a heightened greenback, flourishing stock market prices tend to push down the price of gold and stave off the yellow metal from being bullish. For example, the end of the 2001 bear market for gold coincided with the weakening of the upward trend in the stock market.

"'This can be explained by the dot-com bubble of 2001. As the stock market collapsed after the bubble burst, investors were looking for secure investments, including gold and silver,' stated a report from Sunshine Profits.

"This event ignited the price of gold while the stock markets were in decline. Similarly, in 2008 gold proved to be bullish in the wake of the international financial crisis. The metal's safe haven nature prevailed.

Are we headed for a gold bull market soon?

"As investors begin to regain confidence in gold, many of them have now begun to wonder if a gold bull market is just around the corner. According to several analysts and market watchers, the current global economy is positioning the yellow metal to go bull very soon, with many speculating it might happen before the end of 2020.

"'We're going into a deep economic crisis [that] may be starting in about twelve months [and] maybe lasts two or three or four years ... I think this is going to be a little more gradual with a lot of down days and I think that's what's going to be a really good catalyst for gold,' Dr. Kal Kotecha recently told the Investing News Network (INN).

"Chantelle Schieven, research head at Murenbeeld & Co, shares Kotecha's sentiments, telling INN, 'it is going to take some time so we're looking at an average price of about US$1,330 [per ounce] for the year but we do think there's over a 40 percent probability gold will break US$1,400 [per ounce] in the second half of the year.'

"Schieven's comments are particularly bull-forward due to the fact that most industry insiders see that price as a sure indicator that a bull market is near and if prices can maintain that level for an extended period of time, it will be hard to argue that the yellow metal remains bull-shy.

"Of course, only time will tell where the precious metal ends up, but if current factors remain intact, no one will be uttering the words bear and gold in the same sentence." ("Is Gold Back in a Bull Market," Nicole Rashotte, Investing News, 03/21/19.)

Investors could soon get a golden opportunity to buy the precious metal, says gold ETF chief - Gurdus

CEO of a find management company sees a lower dollar and suggests gold as a defensive positioning.

"Investors could be face-to-face with a golden opportunity, according to one fund manager. While gold prices had a strong start to the year, mounting an impressive February rally, they have erased most of those gains, now up less than 1 percent for 2019... Indeed, on Tuesday, gold futures hit a high of 1,308.8 its highest level since Mar 14th when gold traded as high as 1,310.30.

"But the recent losses could be pushing gold prices to buyable levels, Will Rhind, CEO of fund management company GraniteShares ETFs, said Monday on CNBC's 'ETF Edge.'

"'You've had a bit of a V-shaped recovery in the market, but [with] gold prices selling off, this could well be a buying opportunity for gold at this point,' said Rhind...

"'The world is slowing down,' Rhind said. 'That's a weaker dollar platform in my mind, one of the key things that helps drive gold prices. So, for me, I think: Look at this price and think about defensive positioning.' Rhind suggested that investors who want to take advantage of a potential global slowdown - the likes of which typically sends gold prices soaring as market watchers look to hedge against big losses...

"And with demand for gold picking up in places like China, where inflation is driving investors toward the historically safe yellow metal, and huge mergers by gold companies centralizing the supply, prices might not stay low for long, Rhind warned.

"'Companies can't find these big new gold finds out there, so they're buying each other's capacity, and so that's why you're seeing these mega mergers going on in the space,' he said. 'And ... we don't have to talk about peak gold, but what we're saying is there are no major new discoveries, and therefore supply is going to be more constrained.'

"Gold prices... have been on an uptrend this month that is largely tied to a weaker dollar and ongoing uncertainty surrounding Brexit." ("Investors could soon get a golden opportunity to buy the precious metal, says gold ETF chief," Lizzy Gurdus, CNBC, 03/19/19.)

Gold will rally once Wall Street realizes it's overestimating rate-cut odds, precious metals expert predicts - Landsman

Metals expert predicts gold will regain its shine once investors realize the Fed isn't moving on interest rates.

"Metals expert Suki Cooper sees gold prices hitting a speed bump before they can challenge last year's highs. Cooper, Standard Chartered's executive director of precious metals research, blames it on growing speculation that the Federal Reserve will lower rates within the next 12 months.

"'We really think it's the market prematurely pricing in a cut for this year,' she said Tuesday on CNBC's "Futures Now."

A rate cut is not expected to happen at this week's Fed meeting. But Wall Street is pricing in a 25 percent chance of a rate cut in December, according to CME's Fed WatchTool. Cooper contends that's providing bearish resistance.

"However, Cooper predicts gold will regain its luster once investors realize the Fed isn't moving on interest rates.

"'We expect gold to end the year on a strong note,' she said. 'It's in the fourth quarter that we'll see gold prices testing the highs that we saw in 2018 and 2017 and potentially matching the highs from five years ago.'

"She estimates the precious metal's prices will average $1,325 in the fourth quarter, just $44 below its 2018 intraday high.

"Cooper suggested in late January that it could be gold's year. She still sees ETF demand for the metal and gold-friendly activity surrounding the dollar as a major catalysts behind a second-half bullish move.

"'We expect the dollar to weaken,' Cooper said. 'Also, central banks continue to be buyers as well.'" ("Gold will rally once Wall Street realizes it's overestimating rate-cut odds, precious metals expert predicts," Stephanie Landsman, CNBC, 03/20/19.)

Federal Reserve's Soft Stance Should Boost Gold Prices - Constable

Gold is set to gain as long as the Fed doesn't start increasing interest rates any time soon.

"Gold is set to surge as long as the Federal Reserve keeps a dovish tone to its policies, as it did on Wednesday when it signaled it would keep short-term interest rates at their current levels.

"Historically, when the central bank pauses its cycle of increasing the cost of borrowing money, prices for the yellow metal tend to trend higher, according to a recent report.

"'[...] after the Fed pauses, historical analysis suggests that gold eventually reacts positively as the pause cycle extends and/or the Fed eases monetary policy,' states the March-dated World Gold Council Report. In other words, as long as the Fed doesn't start increasing interest rates any time soon, then price gains are in the cards for gold...

Precious Metals Investors Prove Prescient

"The price of gold has already rallied since mid-August, which was when precious metals investors started to get worried about softness in the U.S. economy. The yellow metal was recently trading at around $1,305 a troy ounce, up from $1,175 on August 15, according to data from Bloomberg...

"GDP growth in the U.S. hit a recent annualized peak of 4.2% in the second quarter of 2018 before steadily slowing to 2.6% in the fourth quarter, according to government data collated by statistics website Trading Economics. 

"Before that economic deceleration last year, investors widely anticipated that the Fed would hike rates as many as four times this year. However, that's not likely now because the outlook for the economy is weaker than previously expected. In January, Fed chairman Jerome Powell said the policy committee 'will be patient,' meaning that it won't aggressively pursue hikes in the cost of borrowing.

"At the same time, even the Fed, which is often optimistic about the health of the U.S. economy, doesn't see a resurgence of the peak growth seen last year, and neither do many other economists. The economy is expected to grow just 2.3% this year, according to a recent survey by CNBC.

"That doesn't even take into account the chance of a recession.

"'We think an imminent global recession will be averted, but its chances remain high at about 25%,' states a recent report from French financial firm BNP Paribas. 'In the event of [a] recession, the US Fed would be likely to slash rates.' Or put another way, if the U.S. economy contracts, the central bank would lower the cost of borrowing.

History Is a Good Gold Guide

"The likely slower growth and the possibility of a recession mean that there is every reason for the Fed to continue to hold tight on raising interest rates, at least for the foreseeable future.

"In turn, that means that gold prices should continue rising and outperforming other assets, according to the WGC report.

"Historical post-tightening periods have shown an eventual strong gold performance, counterbalancing the performance of risk assets such as stocks or commodities, and complementing - sometimes even outperforming - assets such as Treasuries and corporate bonds.

"In other words, once the monetary tightening (or period of increased borrowing costs) stops, then gold prices start to rise, and frequently they can rise faster than those of other assets. 

"The report does add that sometimes the results can take a while to manifest. But it is worth noting that gold prices jumped 7% in the one month following the end of the 2004-2007 rate hiking cycle, and by 18.8% in the 12 months after, according to the report. Those returns compared to 4.4% and minus 16.5% for stocks over the same one and 12-month periods, respectively, the report states...

"A similar thing happened at the end of the Fed's 1999-2001 tightening cycle. In the 12 months after that period, stocks fell 7.4% while gold prices gained 3.6%.

"Or put bluntly, precious metals outperformed stocks by double-digit percentages after both of the last two rate hiking cycles ended." ("Federal Reserve's Soft Stance Should Boost Gold Prices," Simon Constable, The Street, 03/20/19.)

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