Gold stocks continue to look weak in Australia…and some are down 30–40%. Let’s take a look at GDX. This is the US fund that invests in gold stocks. It takes away the Aussie dollar movements that influence the local price for us here in Australia. Clearly it is in a broad downtrend since the peak last August… Why bring it up? Part of the argument for gold is the same as the stock market: Central bank money printing, low interest rates and excessive debt. And yet the market is pricing in a low gold price regardless in the short term. I’m not dismissing holding physical gold or downplaying its long-term potential. I’m trying to suggest that what’s afflicting gold could soon rub off on stocks. Granted — stocks pay dividends and generate earnings. They are certainly not the same. But occasionally different asset markets correlate. Gold and stocks fell and rose in step over 2020. Gold is now lagging. Is this an indicator of brewing trouble for the stock market? I think it might be. So much depends on your time frame here. If you’re holding indefinitely, then a sell-off in January 2020 may not matter much when you look back in 2025. But if you’re looking for short-term moves to trade, or considering establishing a large position now, this is worth thinking about. It was the ‘reflation’ trade that drove everything up in 2020. That can only run so far before the market has to see whether that has come to fruition. Take Qantas for example. Management tell us they assumed international travel would be back by the middle of this year. Now reports surface that Aussies will unlikely travel internationally until 2022. Six months may not seem that much in the grand sweep of a life. But back in August last year Qantas was losing $40 million a week. Every day gone brings more lost revenue and an even more distant return to health. Vaccines, US stimulus, high iron ore prices and low interest rates are built into the current market structure. What then can shift it substantially higher? I can’t make a convincing case right now for Aussie stocks as a group. Don’t get me wrong. There are always individual opportunities, both long and short term. But so much wealth is tied up in passive ETFs that track the index. They might find themselves going nowhere fast. Or worse, down. That is the position of my colleague Jim Rickards. As above, so much of today’s market is built on the idea of recovery. Jim’s not buying that. That sets up a worrying dynamic where the real world economy doesn’t meet the stock market’s lofty expectations. They could reprice sharply off that alone. All this doesn’t mean sell everything today. It means stay prudent. Jim, for one, has a plan in place to navigate these tricky waters. Stay tuned for more important updates on this. Best wishes, Callum Newman,
Editor, The Daily Reckoning Australia | 