Exclusive Precious Metals Outlook and Recommendations
Index updated February 1, 2020
The Blanchard Economic Report
Black Swan Events Begin To Develop
Gold surged 4% higher in January, while the S&P 500 closed out the month slightly lower with 0.2% decline. Geopolitical tensions and economic uncertainties spiked with the U.S – Iranian military action early in the month and the fast-growing China coronavirus spreading around the globe later in the month.
Following the 18% gain in gold last year, it is clear that gold is in the early stages of a historic new bull market. We recap major market drivers in January below.
To the Brink of War
January started as the world seemingly walked to the brink of war in the Middle East. On January 3, the U.S. ordered the killing of Iranian general Qasem Soleimani. After several tense days, Iran produced a measured “tit for tat” reaction launching short-range ballistic missiles at U.S. military based in Iraq, with no U.S. casualties. Both sides publicly stated the desire to avoid war and for now the situation has deescalated.
Gold soared sharply higher after the initial military action in early January, climbing above the $1,600 an ounce. The run in gold at the start of the month demonstrates the confidence that governments, fund managers and high net worth individuals have in the safety of gold and confirms the new bull market that began last summer remains strong.
China Coronavirus Spreads Fast
The other major development in January is a still unfolding story of a world-wide China coronavirus pandemic. The fast-spreading pneumonia-like virus was first identified in China on December 31, 2019 and has now spread to 25 countries outside of China.
At the time of this writing, more than 17,000 confirmed cases are known and over 362 people have died. The Center for Disease Control said it represented an ‘unprecedented public health threat’ and China has quarantined over 50 million people. Growing fears that the China coronavirus could slow global economic activity sent stocks tumbling toward the end of January.
American, Delta and United airlines all stopped flight service between the United States and China, in efforts to slow the spread of the outbreak, but that will also further slow economic growth.
Realistically, this event is still just getting started. The human toll could be high. It remains to be seen how effectively governments around the globe will ultimately be able to contain the virus. Market volatility is likely to remain high and global growth could be affected.
Looking back at the SARS outbreak 17 years ago, the S&P 500 dropped 12% in the 5-month period starting in mid-November 2002 until mid-March 2003. In 2014, the MSCI index of global equities fell 8% at the height of the Ebola concerns.
January Barometer Bodes Bearishly for Stocks
The official Stock Trader’s Almanac January Barometer registered a negative reading last month. The S&P 500 closed lower in January and history shows that sets the market up for a potentially bad year.
The seasonal statistic works off the premise: “As the S&P 500 goes in January, so goes the year.” First devised by Yale Hirsch in 1972, the January Barometer has an 85.7% accuracy rate since 1950.
“The near-term outlook for the market has diminished as every down January since 1950 was followed by a new or continuing bear market, a 10% correction or a flat year,” according to the Stock Trader’s Almanac.
This is just another argument for diversification into tangible assets. Gold is already in an uptrend and if the stock market falls more, more upside in precious metals is expected.
Fed Holds Monetary Policy Steady
Last month’s Federal Reserve meeting brought few surprises as the central bank kept policy on hold at the 1.50-1.75% rate.
Nonetheless, the Fed continues to prop up the U.S. financial system with liquidity in the short-term funding markets. The Fed stated in late January it will continue to buy Treasury bills at least through April 2020 and will continue its overnight repurchase agreement operations, or repo program. This remains a warning flag that the banking system needs the Fed’s support and is supportive to gold as a hard currency.
Presidential Primary Season Begins
As the presidential impeachment appears to be winding down in the trial as the Senate voted to abstain from calling witnesses, political focus will shift to the Iowa caucuses and New Hampshire primaries.
A sharply divided country could lead to a heated and close Presidential contest in November. The stock market may begin to discount the possibility of policy change in the months leading up to the election, especially if progressive candidates, perceived as ‘less corporate friendly’ begin to pick up steam.
The Bottom Line
If you haven’t fully diversified your portfolio with tangible assets, act now as markets are already moving. A new year and new challenges lie ahead. Protect and grow your assets with gold.
The high-end rare coin market remains an attractive buying opportunity for long-term investors. Rare coins offer investors an opportunity for significant price appreciation in the current environment.
The appeal of rare coins to investors is their impressive historical price appreciation, which has outpaced the level of the underlying precious metal.
Buying Rare Coins
For investors able to hold 5–10 years, ultra-rare acquisitions offer the safest store of wealth and the strongest growth potential. Accumulate the highest-quality coins that you can afford. This strategy will pay off handsomely as rarity tends to appreciate the fastest.
Buying Precious Metals
An accumulation strategy is probably the best option for clients wishing to add to holdings.
Trading Precious Metals
Silver continues to offer a better value than gold. Generally, readings above 65 signal that silver is severely undervalued and is a strong buy signal for the metal.
Ratio: 89.00 oz. silver = 1 oz. gold
The gold/silver ratio is a way for investors to measure the relative value of these two metals. The ratio indicates the number of ounces needed to buy one ounce of gold. Investors have long turned to this ratio to identify attractive long-term entry points for precious metals purchases. A high ratio is generally viewed as a signal that silver is undervalued relative to gold. That is what we are seeing now.
You may want to consider converting some gold holdings into silver.
Popular silver products: 10 oz. & 100 oz. silver bars, Silver American Eagles in monster boxes.