Gold and the Dow – Beware the Ides of March

With a scary 1928/29 chart of the Dow showing huge parallels with the current one, and gold seemingly beginning to return to favour are we beginning to see a switch back from general equities to gold?

Sentiment could be beginning to change again for gold. Towards the end of last year many even hitherto pro-gold investors had decided it was time to get out of the metal and the pundits were almost universal in their disdain for it. Indeed investors may well have been worn down by the almost constant media schadenfreude as those who had missed the boat on gold’s constant rise over the previous 12 years gloated as they saw gold fall almost 30% in a year.

By the beginning of this year virtually every bank analyst was predicting another weak year for precious metals, and the recent strength seems to have taken them all by surprise. But, as the saying goes, one swallow does not a summer make, and it is perhaps too early yet to call an end to the bear market in gold but at least there is an aura of hope in the air for the beleaguered precious metals investor.

Now the move upwards which we have seen over the past two months may yet be shortlived, but even so gold has risen by over $100 – or nearly 10% – from its $1187 low in mid-December and has probably been the best performing asset class so far this year with the rise in the metal price itself being sharply exceeded by that in gold stocks – the HUI (ARCA Gold Bugs Index) having risen over 20% since market close just before Christmas.

And there is nervousness developing on Wall Street about the continuing strength of U.S. stocks with the Fed taper about to start reducing the huge bond purchasing stimulus which will have helped lend it strength. There is also a chart doing the rounds which adds to the unease showing an uncanny correlation in the stock market price pattern of 1928/29, just ahead of the Great Depression, and stock prices over the past two years.  A copy of this chart may be viewed on the MarketWathch website (see Scary 1929 market chart gains traction). The parallels in the patterns are, as its accompanying article states, ‘scary’ and if the next leg follows the pattern there is a very sharp (nearly 50%) fall in the S&P and Dow looming.  The implementation of the Fed taper could provide a trigger.

Those investors perhaps interested in historical data – and also in Roman history – might like to be aware that the likely timescale for a collapse in the Dow as suggested by the 1928/9 chart could also tie in with one of the more traumatic dates in the Roman calendar – the Ides of March – which falls on March 15th, the date of the assassination of Julius Caesar in 44 BC which itself was a major turning point for ancient Rome effectively seeing it change from the Roman Republic to the Roman Empire. Far be it for us to suggest any likelihood for a real turning point for the Dow to begin on this date but it would be an interesting coincidence were it to do so!

But, a collapse in the Dow would not necessarily lead to an immediate spike in the price of gold. Indeed, as was the case in 2008, gold would likely be brought down too by the need for those hit by a major Dow decline, but who might also hold gold, needing to sell it to preserve liquidity in a general market crash. However, again as in 2008/9, gold would not retreat as far as the stock markets, and would likely quickly return to a status as a safe haven investment and be the first asset class to see a recovery. That historic parallel is perhaps the more likely should a market crash occur.

In a recent release, the CEO of America’s biggest coin dealership, Donald W. Doyle of Blanchard & Company – admittedly not a disinterested observer – notes “While gold declined last year, that consolidation came on the heels of 12 consecutive years of increasing demand and value growth. With lots of uncertainty still on the horizon, now is not the time for your investment portfolio to be caught with its pants down. Be shrewd and diversify with gold.” 

He probably has a point, with gold breaching $1,300 on the upwards path yesterday and staying there overnight. There could yet be a move by those holding big short positions in gold to try and bring the price back down, but as the amount of physical gold available via the COMEX warehouses is stripped out en route to China and other Eastern and Middle eastern markets the scope for doing this realistically has to be weakening. Should the current small flows back into the gold ETFs continue or accelerate the amount of available physical gold would be reduced further and those that have been trying to keep the gold price within certain parameters may be forced to give up the fight through lack of ammunition.

As Doyle again points out in the Blanchard release, stocks have been stung by recent earnings reports that didn’t meet expectations, and continuing economic woes in Europe coupled with slowing growth in China putting some cracks in the foundation of the recovering economy. These factors, in conjunction with Fed tapering policy, he comments, stand to make a significant negative impact on stocks. “Now is the time to be diversified,” Doyle says. “Gold provides liquidity and is a strong investment to protect and grow wealth. Being too giddy with equities and not holding some gold in your portfolio can make your hair turn grey when financial markets go south.”

This is all certainly not an impossible scenario. The continuing taper has the potential to hit the stock markets, hitherto supported by the Fed’s munificence, and if confidence starts to evaporate a fall could be sharp and steep. The March 15th timescale is as good as any other guess for this to commence – so perhaps the Shakespearean quote – ‘Beware the Ides of March’ could be an apposite one after all! However, up until Shakespeare used the phrase in his Julius Caesar play one has to acknowledge that there was no general association in the Roman calendar between the Ides of March and death or catastrophe – but hopefully it does make for a catchy headline!


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