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LAWRIE WILLIAMS: Could virus recovery trigger a gold, equities and bitcoin meltdown?

Now we are six weeks into the New Year, and both the U.S. and Canadian markets are closed for public holidays, it is perhaps worth drawing breath and reviewing how precious metals and equities markets have fared so far.  Also whether this can be considered a likely precursor to how they will move in the rest of the year,

Taking precious metals first, gold has been behaving disappointingly so far.  It has come off around 4% so far this year – certainly not disastrous, but well below where we might have expected it to be when we made our annual forecasts at around Christmas time.  The star precious metals performer has been platinum, up around 18% since the start of the year, and playing catch-up after a very disappointing previous few years.  Silver is also in positive territory – up around 4% at $27.60 - although well down on its Reddit-driven attempt at a short squeeze which took it up above $30, albeit very briefly.  However that did seem to kindle some investment enthusiasm in the metal which had been mostly lacking beforehand. 

The fourth major traded precious metal, palladium has been the most volatile and is currently down around 3% year to date but its future performance remains hugely dependent on any real recovery in global gasoline (petrol) driven automobile sales, given it remains in a tight supply situation.  We have always been dubious about the metal’s longer term future given the growing switch to non polluting vehicles which do not need exhaust emission control systems requiring palladium, but it may yet take some years, and continuing improvement in battery technology, before this has a significant demand impact.

As for equities and bitcoin they seem to be going from strength to strength and leaving precious metals, apart from platinum in the case of the mainstream equities, in their wake.  The Dow is up 4%, the S&P 500 5% and the NASDAQ a massive 28%.  And all these are dwarfed by the enormous rise in bitcoin of around 170%.  These are all currently hugely driven by social media meme recommendations which are causing unprecedented distortions in the markets.  Traditional investors are being left behind in this brave new world of investment advice.

In our view though this effective market bubble will all end in tears and massive investor losses as, ultimately, more traditional investment parameters are likely to prevail.  Current equity valuations – at least for the high flyers – are no longer predicated on current, or indeed likely future, earnings and are thus unlikely to be sustainable.  And as for bitcoin this is, in our opinion, purely a totally speculative investment and is only supported by a wing and a prayer.  At some stage, when the sentiment supporting its rise melts away, it will come crashing down as it did in 2017, although this time its fall will be far greater.  Many warnings of such are out there from some of the most successful investors of all time, although whether they are close enough to the new investment paradigm to truly judge current market euphoria by past patterns has to remain open to question.

Also note, though, that gold is unlikely to survive a market and bitcoin crash unscathed.  In the current low inflation environment, cash could well be a safer form of wealth protection – it will only lose purchasing power at around 2% a year, while the likely fall in the gold price in the short term could be far greater.  Liquidity issues will adversely impact gold prices, as they have in past market crashes, but it is unlikely the yellow metal will crash as far, and it will probably recover its lost ground far faster, than general equities and bitcoin if and when they plunge.  However the other precious metals may well fall further, and lag gold in any subsequent recovery.  Precious metals investors should be warned, and hold a good proportion of their wealth in cash, which is this writer’s current advice!

But while we feel the above crash scenario is ever increasingly inevitable, its timing is not so.  It could happen within a couple of months – the Harry Dent view - or it may yet take a couple of years.  Ironically if the Covid-19 virus looks to be being conquered by the vaccines, and things start to return to near normal, the realisation that markets are hugely overvalued, and the overall effects on the economy and on employment in hindsight, could well impinge on the general consciousness and trigger a market crash.  It would only take a small change in sentiment to do so.

The main danger in a market meltdown is being too late to realise that the markets are indeed diving.  It’s always hugely difficult to exit at a market top, but if one leaves it late one could find oneself selling into a market which is plunging by the minute as when these downturns occur they tend to be extremely rapid and severe.  It’s probably better to exit too early, although one can miss out on peak gains by so doing, than too late.  One good policy is that if you are invested in something that doubles in value, sell half your holding.  Then at least if the price crashes the very next day you retain your initial outlay, and if the investment keeps rising you still benefit accordingly.

15 Feb 2021 | Categories: Gold, Bitcoin

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