Exclusive Precious Metals Outlook and Recommendations

Index updated October 1, 2018

High: | Low: | Current:

The Blanchard Economic Report

Welcome to Crash Month

It’s called “Octoberphobia.”

October haunts Wall Street with some of the most dramatic and historic stock market debacles ever seen.  

After all October is the home to stock market crashes in 1929, 1987, the 554-point drop on October 27, 1997, back-to-back massacres in 1978 and 1979, Friday the 13th in 1989 and don’t forget the 733-point drop on October 15, 2008.

We are not predicting an October stock market crash this year (although it could happen), but we believe we are approaching an economic and stock market tipping point.

Let’s take a look at what happened last month – and what could lie ahead for the economy, stock market and gold market over the next several months.

Market Snapshot

S&P 500           +8.99%

Gold                 -10%

Silver               -15%

10-year yield   3.065%

The Federal Reserve

The Federal Reserve continues to remove some punch from the party bowl. On schedule, as promised, the Federal Reserve delivered its third interest rate increase of the year in late September. That tugged the official funds rate to 2.00-2.25%, the highest level in 10 years.

Markets failed to react much in either direction to this interest rate hike, which was widely expected and broadcast ahead of time. Nonetheless, it is significant that the Fed removed a key word from its policy statement “accommodative.” Indeed, the Fed is acknowledging that higher interest rates are impacting the economy and consumers in a negative fashion.

That means higher mortgage rates, which are already slowing the housing market in 2018 and higher rates on everything from auto loans to credit card debt.

Stock Market

The U.S. stock market remains generally buoyant, with the S&P 500 up 8.99% year-to-date (through Sep. 28).

Notably, this stock market cycle is extended and aging.

The current bull market in stocks began in March 2009 and is now the longest bull market in history. From risk/reward perspective, additional gains in stock prices appear extremely risky. The stock market gains of 2018 have been fueled by last year’s massive corporate tax cut, which improved price/earnings ratio on stock shares. Fewer taxes equals more “earnings” although overall company revenues may not have changed.

Gold Has Found a Bottom

The gold market has under-performed to date in 2018. Blame the strength in the U.S dollar for the weakness in gold this year. As the U.S. dollar climbs that increases the cost of gold to foreign buyers. They’ve stayed away from gold as the dollar-denominated commodity rose in value in their currency terms this year.

Risk aversion among investors also depressed gold. Yet, there are many potential triggers that could quickly shift the outlook for gold heading into the final quarter of 2018.

What’s Next for Gold?

The daily chart for gold reveals the market has “bottomed” out on the mid-August dip below $1,200 an ounce. We expect gold to continue to build its basing pattern and begin to climb higher throughout the remainder of the year from current levels.

Look For Indian Demand to Surge

From a physical perspective, the Indian Diwali festival, historically triggers large physical buying among Indian consumers in November. Known as the “festival of lights” this event typically sparks a gold buying spree each fall.

India, of course, is the world’s second largest gold buyer behind China.

For India, the Diwali holiday is equivalent to the United States Christmas in terms of consumer purchases. In India, the favorite gift is gold – in the form of gold jewelry, including coins, pendants, rings, necklaces and also coins. A Bloomberg article noted that:

  • Diwali accounts for about a fifth of annual purchases in India – more than any other time of year.
  • Diwali accounts for about a fifth of annual purchases in India – more than any other time of year.

Other Factors that Could Support Gold

Trade War

The trade war is here. Tariffs, which once were a threat, are now a reality. Expect rising prices to filter in for many consumer items, just in time for the holiday shopping season. Further escalation of the trade war could lead not only to higher prices on many goods for U.S. consumers, but slowing economic activity and potentially a recession.

Midterm elections

The midterm elections are looming. There is potential the country could see a change of control in Congress, with all of the political and policy uncertainty that could imply. The stock market does not like uncertainty.

Stock market is overvalued, and leverage is at a historic high

Margin debt is at a historic extreme in the stock market right now. That means investors are buying stocks with borrowed money. If you’ve ever had a margin call, it’s not a pretty picture. If the market turns, investors will be forced to sell stocks fast. Total margin debt hit a new all-time record high at $669 billion in May. What goes up usually goes down. Faster.

The bottom line

Current levels in gold offer an unprecedented opportunity to purchase tangible assets at a bargain price. A change in the economic cycle or stock market could send gold prices sharply higher. If you haven’t fully diversified your portfolio, it’s time to hedge now.

Predicted Price Trading Bands, Next 90 Days

Gold $1,200-$1,275

Silver $14.20-$15.20

Our Recommendations

The high-end rare coin market remains an attractive buying opportunity for long-term investors as economic, political and geopolitical uncertainty climbs. Rising inflation data is another factor expected to underpin potentially dramatic increases in the numismatics sector in the months ahead.

Buying Rare Coins

For investors able to hold at least 10 years, ultra-rare acquisitions offer the safest store of wealth and strongest growth potential.

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: 82 oz. silver = 1 oz. gold

The gold/silver ratio is a way investors 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 to silver.

Popular silver products: 10 oz & 100 oz. silver bars, Silver American Eagles in monster boxes.