I usually warn against reading too much into the financial media’s (backward-looking) explanation of a market move that just happened.
But it really does seem that everyone’s suddenly worried about interest rates moving too high, too quickly.
We all knew rates had to go higher. The Fed drove them to the floor, kept them pinned there for years and then, in 2013 (remember the “Taper Tantrum?”) began talking about the beginning of the end of their zero-interest rate policy (aka “ZIRP”).
Inflation and a one-way train of higher rates have been brewing concerns for years now. But until February 2, when wage growth came in hotter than expected, these concerns hadn’t been enough to spur a sea change in investor behavior.
Now, though, everyone’s panicked.
Yesterday, the 10-year Treasury rate hit a high of 2.88%. That’s as high as it’s been since, well, the height of the Taper Tantrum in late 2013.
The market has absorbed five solid years of concern over a future with higher interest rates, inflation… and yes, potentially even the hyperinflation that gold bugs are infamously on guard against.
And then on February 2, it’s as if the market just couldn’t absorb an ounce more. Alongside that wage growth report, interest rates leapt higher and bond prices sank sharply lower.
Realize though, inflation concerns aren’t contained to the bond market.
Utilities stocks are more than 15% off their highs and lagging every other U.S. stock sector – a tell-tale sign of concern about inflation ahead.
And the real estate sector is now off more than 20%, entering an official “bear market” during last week’s swoon.
The bottom line is: everything that’s sensitive to higher interest rates is getting dumped.
And gold prices looked primed for a rally.
It’s been a rough road for gold bugs since the mid-2011 peak in precious metals.
Gold prices have steadily trended lower, in the classic pattern of lower highs and lower lows.
But that five-year trend has already turned and gold prices are currently in an uptrend.
The turn began in 2016, when gold (GLD) gained around 30% by July. That move was “too far, too fast” and the excess was slowly worked off into early 2017.
But gold never made lower lows. Instead, it began to establish a new bullish trend – marked by higher highs and higher lows.
This was a newly-budding and still-risky trend until last week’s sharp sell-off in stocks and bonds. Alongside the loss of confidence in paper assets – stocks and bonds alike – gold prices are up.
There’s no way to know just yet if last week’s swoon was the beginning of the end for stocks.
But investors are scared!
Scared of bubbles in overvalued paper assets – from stocks to bitcoin. And scared of higher interest rates, inflation, and maybe even hyperinflation.
If we’re in the midst of a “topping process” for stocks, gold prices should rally through that process and awhile longer.
Shares of the SPDR Gold Trust (NYSE: GLD) gained 18% and 26% in the first three and six months of the 07/08 top that began in October 2007.
In short, gold is almost always a top-performer during the topping process of an aged bull market.
Combine that with the now-palpable concerns over inflation and higher interest rates and it’s clear: it’s a great time to make a bullish play on gold!
Buying shares of GLD is an easy way to add a little exposure.
Editor, Cycle 9 Alert
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