February 4, 2020
I am Short Gold – When nobody else is…?
As I stated in last week’s newsletter, I am not at all an authority on Coronavirus…Like 99.99% of the planet, I’d never heard of it until a few weeks ago…But with this supposed “crisis” DRAMATICALLY affecting a number of markets…and since playing the market guessing game is the only thing I do, I am working hard to understand what might be expected in various markets going forward.
So…We all know what HAS happened…that Stocks have sold off somewhat sharply, as well as a number of commodity markets…with today’s media driven idea being that the Coronavirus could potentially crater China’s and the World’s Economies…thereby endangering profits and the demand for any number of commodities…which has obviously led to the steep, FAST, almost nonstop price declines.
I should say that I never have a desire to see any market, anywhere, go either up or down. All I try to do is understand what I believe is likely to happen…to be as objective in my research and analysis as I possibly can…and then stake out positions based on my conclusions.
I still believe what I wrote last week: My general impression is that the ill effects of the virus are being incredibly overblown by the media and the markets…that this is just the next Information Age Instant “Crisis” that will have a short front page shelf life as it becomes apparent that this virus is not the Bubonic Plague, nor rampant Ebola.
And after doing a little more digging the past few days, I am even more convinced that this is the case…that this LATEST “crisis du jour” will pass…and perhaps fairly QUICKLY…and with it we will be seeing equally sharp reversals of what Stocks, Bonds, Gold and Commodities have been doing for the past few weeks…In other words, Stocks will be going RIGHT back up, as well as markets like Crude, Copper, Corn, Wheat, Cotton and Soybeans…while Bonds and Gold, the so called “safe havens” that have benefitted on the upside, will be doing very much the opposite…that is, going straight back down. As always, these are MY opinions and I may be dead, dead wrong. Really.
Why would I think the Coronavirus will have become nothing but a back page news item a few months from now? Why would I think this is NOT the globally shattering “crisis” that some people are making it out to be?
For one, it can certainly result in death (especially in the elderly, similar to the ordinary flu) but statistics indicate that its fatality rate is no where close to that of the SARS (Severe Acute Respiratory Syndrome) epidemic that swept thru China and Asia in 2003…The data for Coronavirus is definitely unfolding, but so far the fatality rate is in the 2% range (or less)…while for SARS it was estimated to be more like 10%...in other words, FAR more deadly.
Also, like the common Flu, and SARS, this IS a SEASONAL virus. It’s not like Polio, or Small Pox, or other diseases that could be spread year round…and as such it DOES tend to dissipate during the next 2-3 months…And besides the fact that measures are immediately and aggressively being taken to contain it, by the time we get to the next year’s flu season, I would imagine that vaccines and preventive actions will then be solidly in place…or that, like SARS, it will have basically disappeared by the following year (see below).
While SARS may just be a distant memory for you, in fact, back in 2003 it was big story in Asia and the world markets…producing the same fears as we are seeing today vis a vis its effect on the public…and potentially the Asian and World economies. And no, I don’t think it was played up as much back then as the current Coronavirus…but then again, as a market and media observer, I can, without ANY doubt, tell you that in 2020 just about EVERYTHING gets blown up bigger in the media than it did 17 years ago….That is, if SARS was occurring today, with its higher fatality rate than today’s Coronavirus, the news would be even MORE alarming than we are currently seeing.
Just for reference, here are few facts related to SARS and the 2003 outbreak…
Severe acute respiratory syndrome (SARS) is a viral respiratory disease….caused by the SARS Coronavirus. Between November 2002 and July 2003, an outbreak of SARS in Southern China caused an eventual 8,098 cases, resulting in 774 deaths reported in 17 countries, with the majority of cases in mainland China and Hong Kong (9.6% fatality rate) according to the World Health Organization. No cases of SARS have been reported worldwide since 2004.
And here is what the Stock Market did in late 2002-early 2003 as the disease was spreading.
And then…there is the chart below…and this just one piece of data, but take a look at how SARS developed…and then TOTALLY faded away…in Beijing during that “epidemic” back in 2003…I don’t think I need to explain the chart as I think it quite simply speaks for itself…and demonstrates my point, that the Coronavirus outbreak WILL most likely have a definitive END.
And do note…that the Dow Jones, which had fallen 16% on SARS fears, absolutely TOOK OFF on March 12…and kept going…precisely when the SARS epidemic was just starting to accelerate.
And I will reiterate: No cases of SARS have been reported worldwide since 2004.
And again, I am certainly NOT a epidemic expert, but I can’t help but think it will be no different with this Coronavirus…that it WILL obviously result in loudly stated infection numbers…and deaths…but that it WILL fade away…And the markets, I believe, will be reversing/recovering FAR ahead of that “fading” news story…And quite possibly those recoveries could be beginning as early as this week (in other words, now)…as this latest “crisis” shifts its gaze to whatever else the media next wants to worry about.
I say it over and over…It’s all about mob psychology guys…Prices change based on that…especially regarding FEARS…more than anything else…So yeah…As I wrote last week (and for years before) I think the STOCK MARKET WILL CONTINUE MOVING HIGHER…
And this next section is probably a waste of my time…but it is the primary reason for this newsletter….
Short Gold Now…
From experience, I know that the idea of shorting this market RARELY gets any takers, as generally speaking, pretty much ever since I got in this business in 1980, the overwhelming majority of opinion out there has been, “Buy Gold!”, even though it spent the first 20 years of my career going down until 2000, then rallied until 2011 before losing almost 50% of its value…and now, 9 years after its all-time highest price, is still some $400 below that high…
But even so, opinion is still the same…STILL bullish, no matter what…with seemingly just about every brokerage house I see sounding like a LEAP to new all record highs this year is practically a given…Honestly, I know there must be some analysts out there who are bearish Gold, but I’m not seeing them…All I hear is a lot of, “heading for $2000!”
I have long been of the opinion that Gold moves on nothing more than investor sentiment, that its ups AND downs have little to do with the traditional supply and demand factors that might be found in markets like Copper, Cattle, Soybeans or any other commodity market that actually gets produced and consumed…You can’t eat gold, it pays no interest (beyond personal use, it actually costs you to own it), its primary ”use” is for jewelry…but I firmly believe that THE primary force that moves this market on the upside is purely speculative/investor “demand” that itself is based on nothing more than semi-unanimous predictions that “Gold has got to go up.” So “Go buy some and wait for the profits to come rolling in.” But, conversely, fear-induced SELLING by those same former buyers (many of them usually LATE to the party) can be a MAJOR factor in what moves GOLD on the downside…often MUCH faster than it previously went as it can involve emotional “Get me out. I’m losing!” types of selling…Never forget: A lot of buying can push a market higher. And a LOT of selling can do the opposite. This GAME is all about people getting in…AND getting out.
Be assured that I know all the supposed reasons to own Gold (hyperinflation, geopolitical fears, the world economic system falling apart, as a replacement for fiat/paper currencies, etc.) but I personally see it as just another commodity that periodically gets hyped by Wall Street, especially when it HAS BEEN moving up for a while…that every now and then, everybody gets sucked into buying/owning Gold, even though its principal value is based on nothing more than the premise it can ONLY be going up...only to later discover, painfully, that it CAN go down…and sometimes quite rapidly and in big chunks…AND…in my opinion that is exactly what it looks like we are ready for now. Per the charts following, it appears that a TON of investors, seeking “safe havens”, piled into Gold last year (when seemingly every analyst and economist in New York was predicting “the coming Recession”), and all those buyers are just sitting there, loaded up and thinking Gold is primed to “break out ” into new all-time highs…when all I can imagine is that EXACTLY THE OPPOSITE is about to happen…
As I said, there are…once again…a TON of speculators long this market…and I think they are about to get it handed to them…as all of those former Buyers become major Sellers.
See for yourself.
And here is kind of the same thing…just seen from another angle…that of showing you WHO is LONG and WHO is SHORT.
Here is what has happened during the past 40 years…and what I look for from here…
What I would recommend…
This is not a “cheap” trade…But as can be seen above, $100-$200 swings ($10K-$20K per futures contract) are almost routine here…
My final comment would be…If I am right about the “temporary” effects of the Coronavirus…and I easily might not be…I will reiterate that I quickly expect to see upside reversals of all of the selloffs in Stocks and various commodities (Energy, Copper, Grains, etc.), as well as seeing, along with Gold, a HARD decline in Treasury Bonds and Eurodollars…In essence, I view all of the scary “worldwide plague coming!” headlines as having produced a BRIEF interlude in which normal buyers just stuck their hands in their pockets…and very little (any, really) selling was able to collapse a number of markets…BUT…the buyers WILL be back (or already are)…and the World Economy is NOT going in the tank (far from it) and prices could therefore easily be right back where they were…and HIGHER…again, very quickly.
Give me a call if you think any of this makes sense…or not. Whatever they are, I love to hear your opinions.
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Gold