The new years first week is well under way, and 2016 so far hasnt been kind to the global stock markets. As some analysts have shown, opening day for stocks often sets the tone for the rest of the year.
In a note titled The 7-Year Cycle in Equities Is Rolling Over…Buy Gold!, one major Swiss investment bank is throwing caution to the wind and predicting the end of the seven-year bull market in equities, with a significant correction forecast for the S&P 500, or SPX.
20% to 30% decline seen: Tactically, after a weak start into January, we still see the chance of a bounce and selective overshooting in later [first quarter]towards 2,200 to best case 2,300, wrote a UBS team led by Michael Riesner and MarcMller. However, looking at the further increasing selectivity/volatility globally, andtaking into account that from a cyclical aspect the eight-year of a presidential turn has quite a negative trackrecord, we expect the SPX to move into a [second quarter] top and fall into a full-size bear market, with risk of a 20%to 30%correction into minimum later 2016 and worst case early 2017.
What does a potential bear market for stocks mean for gold? Precisely what you might expect for two asset classes that historically often move in opposite directions: UBS is predicting that the building blocks of a new bull market in gold will fall into place in 2016.
Dollar goes bearish by 2017: Gold has been trading in a cyclical bear market since 2011, the team noted. In 2016, we expect gold and gold mines moving intoan eight-year cycle bottom as the basis for the next multi-year bull market. Initially, we see gold profiting as a safehaven and as of 2017, gold could profit from the U.S. dollar moving in a major top and starting a bear market.
A key catalyst for a turn in the dollar would be if the Federal Reserve reverses course and loosens, rather than keeps tightening, monetary policy in reaction to deteriorating economic conditions. This big U-turn in policy might result in a fourth round of quantitative easing, or QE4.
However, UBS apparently isnt predicting a straight-up move higher from here. It sees the potential for another major buying opportunity that investors should not be concerned about, but rather seize with both hands.
A potential bottom in 2016 bottom could be a rather powerful bottom, since together with a four-year cycle low we have also an eight-year cycle low projection for this year, its analysts wrote. In this context we expect a potential 2016 low in gold to be the basis of a new multi-year bull market.
No bubble until $3,300: For UBS, the bull market in gold never ended with the 2011 peak and subsequent price drops. Rather, the pattern in evidence today is merely like what occurred during the mid-1970s. Pattern wise we continue to see the 2011/2016 cyclical bear market in the same context as the 1975/1976 bear cycle in gold, UBS argued. Keep in mind, in the mid-70s gold lost 43% of its value from its January 1975 top before another gold bull market started into the January 1980 bubble peak. It is amazing to see that with a loss of 45% from its August 2011 top into the early December 2015 low, the decline in gold has more or less exactly the same proportion as in the mid-70s.
Furthermore, there are still a lot of market commentators who say that the August 2011 top in gold was the top of a bubble. According to the average gains we have seen in historical financial bubbles, the gold bull run from 2001 into 2011 (760%) was far away from any bubble territory. In the first gold bubble, gold gained 2400%. In the 1903 to 1929 Dow bubble, the Dow Jones Industrial gained 1200%. The 1979-1989 Nikkei bubble came in at around 2000% and the 1980-2000 Nasdaq bubble topped out a +3900%.
So if gold moves into a bubble, we would need to see a gold price of minimum $3,300, and in this case we would still talk about a low bubble phenomena such as the 1903-1929 Dow Jones bubble!!
In other words, if UBS is correct, you aint seen nothing yet in gold, and the $1,900 peak reached in 2011 could be merely the opening act or intermission before the yellow metals bull-market resumption and all-time record-setting crescendo.