Gold’s Getting Trendy

Precious metals tiptoed higher this week, despite USD strength remaining. Gold in USD held the all-important psychological $1,200 handle successfully and has climbed to USD $1,228 at time of writing. Silver needs to hold USD $14 and has been successful so far, with prices hovering around USD $14.50 at present.
 
In local currency terms, both metals are trading slightly higher at AUD $1,694 and AUD $20.20 respectively with the AUD ever so slightly lower than last Friday.
 
The recent volatility in equities continued this week, in a big way, with tech stocks in the US plunging. The tightening of monetary policy and its effects on broader markets is once again coming into question, spurring fresh doubts on the Fed’s ability to continue on the path of higher interest rates. We expect this trend to continue with the Fed likely having to pause path in 2019.
 
Gold has proved itself as the only true save haven of late, as I don’t think many people sitting on an 80-90% ‘pull back’ YTD in cryptocurrencies really care about the un-correlation to equities at this point.

 
Gold is looking good and in trend at the moment as the above chart paints a pretty picture. The moving averages on the daily chart above are suggesting that a new medium term uptrend is developing. A bullish formation would see the 20-day, 50-day and 100-day all swing higher with the 20 and 50-day averages above the 100. It is certainly looking like this could develop in coming weeks and odds favour a rally in precious metals on the back of some USD weakness to come. Watch this space. If the volatility in US equities continues, this should further spur safe haven buying as some funds flow out of equities and into gold. If we get a move large enough to get past recent highs of USD $1,240, we could see some short covering and new longs come into the market, further fuelling a rally from that point onward.
 
A good sign is the pickup in physical demand, which we have seen over the past few months, and interest in bullion seems to be on the rise. Google trends search for ‘buy gold’ VS ‘buy Bitcoin’ can be seen below and we can see a recent tick higher in gold. Not surprisingly, Bitcoin interest peaked right at the peak of the market and has dwindled down ever since.
 
 

Bitcoin Butchered

From a technical perspective, Bitcoin broke through the most significant support level of 2018 this week. After holding USD $6,000 for so long, there was always going to be a brutal sell-off if this level finally failed convincingly. A textbook setup here of lower highs throughout 2018 and a final break of support was all she wrote.
 

 
 
There was some negative impact of the recent Bitcoin Cash fork and yet another Bitcoin branch created known as “Satoshi’s Vision”. It’s all getting a bit ridiculous at the moment and the market must agree, as cryptocurrencies had the worst week in some time. Our market updates have been consistent over the last few years with the message of ‘do not invest what you can’t afford to lose in this space.’
 

Tech Gets Crushed

It has been an absolute blood bath for tech stocks in the US of late, and with good reason, as valuations across the entire sector have gone from ridiculous to extreme in recent years. The above chart of the Nasdaq looks eerily ‘toppy’ so we will take a look at some of the companies that have seen the most vicious sell-offs and point to why it may not be over.
 
Semi-conductor makers Nvidia and AMD have seen a decent pick up in GPU sales in recent times on the back of the crypto mining boom. As crypto turns out of favour, this demand will look to wane and the lofty valuations have taken a hit in this sector of late. Nvidia and AMD charts below respectively.
 

 
Chipmaker AMD seems to act like a canary in a coalmine as an indicator of peak irrational exuberance. The chart above shows the last two times the share price really spiked was April 2006, shortly before the GFC and top in the S&P500 and previous to this was the Dotcom mania of 1999 right before the bubble burst. Will this latest irrational spike to $32 a share signal a broader market top yet again?
 
The chart below of the S&P500 can be used to compare dates with the above to see the uncanny timing of the previous spikes. 
 

 
The scariest thing about the recent sell off in the tech sector is that despite the dramatic plunge, a lot of these companies are still trading at eye watering valuations relative to earnings. 
 

 
The table above lists some usual suspects in the tech space and their current price to earnings ratio. Nvidia has dropped form a high of $289 in October to $144 today, but still trades around 20x forward earnings. With Tesla and Snapchat unable to make a profit, the only reasonable one on the list would be Apple at 14.86X. Clearly the market is concerned about “peak apple” as they have stopped reporting sales of individual products, potentially in an attempt to hide iPhone sales declining.
 
The rest of the list is currently trading 38 and 95 times earnings, so if you cut the market cap of these companies in half you would still be looking at reasonable-to-expensive valuations by historical standards. Not calling for a definitive top and start to a bear market, but what we can say is there is plenty of room below if fear becomes the primary motivating emotion over greed.
 
With current valuations and a tightening Fed, it will surely be difficult to preserve capital, let alone make reasonable gains in equities in coming years. A healthy allocation to precious metals should at least provide balance to an overall portfolio if indeed we see a much larger correction in equities moving into 2019.
 
Until next time,
 
John Feeney
ABC Bullion

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