Bubble, toil and trouble

Published June 2013 in the magazine: Macau Business

by André Ribeiro

Trouble ahead for Stocks

The stock market rally since last November has been strong, the Dow Jones Industrial Average (DJIA) thrusting above 15,000 points, and the S&P 500 surpassing 1,600 points for the first time ever. One important cause of the rise in equity prices this year is the massive injections of liquidity by central banks. There may be a correction of 5 percent to 10 percent in the middle of this year with the DJIA on its way to probably exceed 17,000 in the next few months, reaching the upper boundary of the megaphone pattern I wrote about in these pages in March. U.S. stock markets are probably in the final stage of forming a big multi-year top, which will be followed by the deepest stock market decline in years. The present pattern of movement in the prices of precious metals and mining stocks is similar to the pattern in 2008, when the price of gold began rebounding from a drop of about 30 percent, on its way to climbing above its previous peak about a year later. The price of gold between April 1 and April 15 this year, fell by 18 percent or $220 per ounce, plunging by 9 percent in just one day. However, strong demand for physical gold cushioned the fall, and by the end of the month the price had recovered to about $150 above the floor of the latest trough. Many retail investors took the opportunity to buy, and queues formed in gold shops in Macau, Hong Kong and mainland China. Investors often focus on financial markets and news, and fail to understand that gold and silver are commodities governed by the conventional law of supply and demand. If the price falls, demand increases.

Modern Alchemy
Few analysts or investors are aware that the prices of gold and silver have been depressed for decades by investors concentrating on the financial markets. Data for the futures markets is available, but there are no relevant statistics for over-the-counter markets. This is explains why steep falls in the prices of precious metals can coincide with shortages of physical gold and silver and increased demand for them. If central banks intervene in the gold market from day to day, they do not do it publicly. There are great financial temptations to rig the markets for precious metals, just like the London interbank offered rate was rigged. A correction in the prices of gold and silver and of mining stocks, which has been happening for almost two years, is nearly complete. The prices are set for a big rally. The rally may be about to begin in the next few weeks. Sentiment among investors and technical indicators are like they were in the past when markets hit bottom. These are trends that individuals and institutions can take advantage of, and so make a profit from their investment portfolios. Who knows? Perhaps in the future Macau will have a sovereign wealth fund to play with.

The views expressed here are those of the author and are not investment calls by Macau Business