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Late Stage Bull Market: Changes In Trends - Gold

Since 2009 I have been an equity market bull and since the start of 2013 when the S&P 500 broke to a fresh record high, my bullishness was turned up to “11”. That also translated to being one of the biggest haters of gold, a useless commodity during times of intense asset price inflation. Asset price inflation and normal goods inflation are entirely different concepts and one doesn’t not necessarily lead to the other. Hence, we have seen the gold market littered with the corpses of gold bugs over the past 3 years. Their view of central bank stimulus eventually leading to an asset market collapse as rampant inflation drive gold into a major boom. They may be eventually correct but being right and making money are very separate things, and one doesn’t guarantee the other. Timing is everything.

As 2015 draws to a close and approach 2016 - a time that I have promoted as potentially when this bull market ends – cracks are appearing in global markets and trends that were clearly absent in recent years. Unfortunately contrary to most opinions markets don’t just “crash”. It isn’t a case of straight up, turn on a dime and straight back down. Market peaks are a lengthy and drawn out process and before the eventual crash many signs and cracks appear first.

To be able to know when market downside risks increase markedly, is a case of being aware of these other changes. Now naturally it’s not the same everytime. In the GFC it started with US homebuilders that peaked in 2005 and fallen 80% in value before 2008 even began. US investment banks peaked in 2006 and credit markets witnessed significant volatility and stress in mid-2007.

Fast forward to 2015 and I have discussed several of these issues or warnings signs of ‘cracks’ appearing in asset markets that suggest we are in the late stages of a bull market. I highlighted how you as readers and investors can keep a track of these warnings signs – from the demise of the oil producers, to the outflows in emerging markets (equities and bonds) as well as the deterioration in high yield or junk bonds (as measured by the HYG ETF in the US).

I won’t repeat those views again in this article. Instead I want to focus on my bearish views on gold and silver having turned more positive in the past few weeks. While technically speaking we haven’t seen a clear change in the price action and trend in the charts that is any different to the bear market rallies of the past three years, but there are encouraging ones. We have also seen significant moves in gold producers as well. With the decline in gold prices since 2011 producers have had to cut costs and improve efficiency to combat falling margins making them fundamentally more attractive even with a stable gold price.

Now let me make this clear, I am not flipping from being bearish to being a raging bull. For the first time in several years I have gold and silver exposure but it is only small and with a $100 rally in gold I would certainly look to take profits. I am willing to cautiously buy dips as I continue to “work out” whether gold is at the start of a new uptrend and what that means for the rest of the world. This is in stark contrast to recent years where I only sold rallies and saw no reason to hold gold in any portfolio.

Given the developments and volatility of equity markets in the past two months combined with the Fed having extreme difficulty raising rates, the huge outflows from emerging markets and junk bonds, gold needs to be viewed in a different light. Interestingly this is coming at a time when gold is showing signs of trend changes. One of the key factors I am watching is the RSI testing the downtrend line from the 2011 peak. RSI trendlines can often break before trendlines on physical charts and if done, could trigger a broader move to $1300/ounce. This should also coincide with the MACD indicator trying to move above to zero line for the first time since 2012. Every rally before then failed at that point.

So signs are showing for a potential longer-term turning point for gold and this is another “crack” in the long-term bull market for equities. However, the timing of when the demise for equities will come is still unknown but we need to be more cautious and have holding period far less than before. Like I said in recent weeks this isn’t a buy and hold market at the moment particularly when the world is undergoing some very big changes.

View More Articles By Greg Tolpigin

Greg is the Head of Proprietary Trading at Gleneagle Securities and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.

After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.

Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.



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