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The S&P/ASX 200, the gold price bubble and the global recovery.

March 11th, 2010 · Greg Atkinson · 29 Comments

I have a message for those people who fled to the hills over the last few years fearing that global trade was going to collapse, paper money would be worthless and that gold would be the only thing worth owning for years to come and that message is:  “the global economy is recovering, please come back and join the rest of us”.

The Australian stock market is not soaring to new highs that is true, but slowly investors are becoming more optimistic about the future.  The S&P/ASX 200 Index has been trying for months to break through 5000 and although it has struggled, it has never looked like testing the lows of March 2009 again.

As I have said plenty of times before, it is most likely that we will not see the  S&P/ASX 200 or ASX All Ords drop near 3000 again for a long time,  if ever. The worst is now behind us. The global economic bubble went pop, lot’s of money was lost and now we are in the midst of a slow and painful recovery process.

As the chart below clearly shows, the overall trend since March2009 has been upwards,  although over the last few months the market has basically moved sideways. This is a good sign, as it means that fear is not gripping the market when there is some bad news and this should provide a base for the next rally, and upwards is where I expect the market to move this year as I said back in September last year.

Australian S&P/ASX 200 Index (XJO) 5 year chart (March 2010)

asx-200-5-year-chart-mar-10

I am not saying that the global economy is back to normal, whatever normal is, but the great global depression that the doom crowd said would sweep the world did not happen and will not happen this time around. They were wrong, but I suspect many of them are still talking up gold, although they are probably seriously thinking about selling soon.

Will gold prices go up from here? Maybe, I am not expert at picking the tops of bubbles but they are not going to hit $2000 USD an ounce this year based on supply and demand fundamentals.  Gold prices are in bubbleland in my opinion, but this is just my view so please don’t take this as form of financial advice or base any trading decisions on my ramblings.

I know some people say that the long term trend for gold prices is upwards, but the same can be said for beer prices.  However for gold (not beer) the next major move in my oppinion will be downwards and let me use a few charts to show you why.

Firstly let’s have a look at the ETF (Exchange Traded Fund) GOLD versus the ASX All Ordinaries over 5 years. Once again I am using the ETF GOLD as it reflects gold prices in Australian dollar terms.

ETF GOLD vs ASX All Ordinaries Index 5 year chart (March 2010)

etf-gold-vs-all-ords-5-year-chart-mar-10

This chart shows very clearly how gold prices took off as the global financial crisis (GFC) started to take hold in early 2008.  The big spike in the gold price in late 2009 was as a result of the collapse of Lehman Brothers and this illustrates how gold prices trade at a premium when fear is the prevailing emotion amongst investors.

As you can see gold prices in AUD terms have soared way ahead of the ASX All Ords and I doubt this situation will last for much longer. In other words I reckon gold prices are going to come down, the ASX All Ords Index will rise and that the close correlation between the two will be restored, it’s that simple.

But maybe you are think that a  simple correlation between gold prices and the All Ords doesn’t mean much? Well let’s toss in oil and gas prices as well and see how that looks.

ETF GOLD vs XAO vs Oil & Gas Index 5 year chart (March 2010)

gold-vs-xoi-and-xao-5-year-chart-mar-10

The chart above shows how the ASX All Ordinaries (XAO) and the AMEX Oil & Gas Index (XOI) are once again pretty much in sync and fairly closely aligned. But as the chart shows,  gold prices are still up at record high prices and gold is still trading at what I would call, GFC levels.

Make no mistake about it, the demand for gold for industrial use or for jewellery is not driving gold prices towards these high levels. The high gold prices are being driven by investment demand.

Many experts say gold prices will keep going onwards and upwards and crack $2000 USD an ounce this year.  I am not an expert, but I disagree with that forecast and will quite happily acknowledge that I am a complete gold market dunce if that happens.

As for the overall stock market, I am not expecting 2010 to be a bumper year but rather just a year where we see the global economy slowly recover. Economic growth in China may slow, but a gradual recovery in the U.S, Japan and Europe should counterbalance that and the stage should be set for global economic growth in 2011.

So for those people who might be up in the hills hiding in the fallout shelter I think the time is right for them to come down and smell the roses.  Capitalism is not dead, you don’t need to use gold coins to buy food and the world is open for business.


29 responses so far ↓

  • 1 SV // Mar 13, 2010 at 1:08 pm

    Greg,
    understandably people don’t quite believe that things are back to normal, notwithstanding ASX200. There was the GFC, there were problems that caused it (ie unproductive and irresponsible use of debt); you would expect structural changes before you conclude the problems are fixed.
    Where are these changes? It seems to be business as usual, especially in Australia – where irresponsible and unproductive use of debt only accelerated.

  • 2 Greg Atkinson // Mar 13, 2010 at 5:39 pm

    SV I agree with you. I have written for over a year about the problems the Australian economy needs to face up to and one day our luck will run out. I am not suggesting it is business as usual but on a global level, things are certainly better than they were 12 months ago.

    In Australia the use of debt to pump prime the economy has been a disaster and for all the billions that have been spent I doubt we will see any long term boost to productivity. Instead of investing in high speed rail, R&D or nuclear power etc we blew our dough on imported sub-standard home insulation, iPod docking stations and school halls that are not even fitted with solar panels.

  • 3 Anon // Mar 17, 2010 at 12:39 pm

    Well Greg you’ve been spot on thus fair, and I’ve been dead wrong!
    I exited around 4,700 and have been cringing ever since — altho I was aware that we could keep rallying from those levels. Citigroup and Walmart are the only things I kept which I put severe concentration on (20% of entire portfolio). So I guess I have some saviour ! Follow the gurus and you shall be rewarded ;).
    As for where I think we might go…i rkn 1200 on the SPX is around the level we might top out at. My sentiment readings are still not extreme enough in terms of bullishness and the risk trade currencies are breaking out.
    Volume is anemic and cyclical companies earnings, the true measure of an economic recovery, all have been shocking. Toll off a cliff. I think we might have a range bound market abit like the post 87 crash or in the early 90s. In those situations we essentially did nothing for several years.
    I am looking at around 4,250 on XJO for re-entry

    Remember not advice just banter, see a financial adviser for info, advice etc etc.

  • 4 Greg Atkinson // Mar 17, 2010 at 1:12 pm

    Well Anon I am never spot on sadly, but I do try and get a feel for the general flow of the markets. As I have been saying for around a year, the 4800 – 5200 on the ASX All Ords/ASX 2000 will be tough to crack because if you take away Government spending, then Oz economy is basically in a recession.

    I am actually a touch bearish on the long term outlook for Oz and am generally staying clear of most domestically focused Oz stocks.

    I reckon we might see the market get down near your re-entry point if we get some data out of China that suggests the economy is cooling. It is not something we should worry panic about in Oz, but the media and Government have talked up the Chinese economy so much that I reckon investors will get easily spooked by any hint of “bad” news coming out of Beijing. What do you reckon?

  • 5 Anon // Mar 17, 2010 at 2:23 pm

    Yeah for sure. Everyone thinks that China will save us, but China is still reliant on the US which is in the stink hole.
    I’ve never quite understood how China would stand alone when alot of its growth depends on us buying their cheap goods.
    Recently, I talked to a few retail businesses in the states and sales are still shocking.

    “I am actually a touch bearish on the long term outlook for Oz and am generally staying clear of most domestically focused Oz stocks.”

    I think we’ll get through this, but you cant go from excessive leverage, spending, to the brink of a depression and then suddenly your back into the same patterns that got you there in the first place. People think the economy is like a spring that just shoots back as fast as it collapsed. Its going to be painful and slow unfortunately ! I like your strategy re: less domestic Oz exposure, I haven’t had much exposure in Australia for sometime.
    I think the places to be on any severe correction are things that people flock to when they lose confidence in fiat money. Given we might need multiple stimulus and growing government debts theres alot of future catalysts for loss of confidence in certain currencies. The problem is that most of the places people have flocked to are now ludicrously overpriced so it seems more risky than owning the equivalent in cash !

    Above not advice, just banter…get advice from a financial adviser etc that knows your circumstances etc.

  • 6 Ned S // Mar 17, 2010 at 3:04 pm

    A Brit trader (Nadeem Walayat) I’ve been following for a while commented on his overall investment position recently – And as a result was asked “Why do you have 70% invested in bonds and cash if you expect inflation?”

    Answer: “Stocks and commodities are high risk, I’m not going to go much over 1/3rd portfolio exposure to these no matter how bullish I am.” 🙂

  • 7 Greg Atkinson // Mar 17, 2010 at 3:40 pm

    Anon yes I think it will take a while to sort out the whole GFC mess and there are still some market distortions to be sorted out. China has a great run but the run will come to end just as it did for every other “miracle” economy. I also recall it was not that long ago that people were raving about Ireland and were labelling it’s “miracle” economy” the “Celtic tiger”.

    Yes the major economies of the world will get through this mess, but my guess is that they will have their wings clipped for quite a while and I reckon Australia will soon find that so called mining boom alone will not drive the economy onwards and upwards. We still import more than we export and household debt is still very high.

    Ned I would agree that stocks and commodities are high risk. The only thing I feel a little comfortable with is exposure to quality companies in the food production area.

  • 8 Anon // Mar 17, 2010 at 3:59 pm

    Hey thanks for the quote Ned, never heard of him…whats his track record like ?

  • 9 Anon // Mar 17, 2010 at 4:06 pm

    Suspension of demand/supply law for base metals:
    http://cij.inspiriting.com/?p=1160#comments

    Interesting chart: Number of home loans vs Size of home loans:
    http://cij.inspiriting.com/?p=1170#comments

    Above not advice, just banter…get advice from a financial adviser etc that knows your circumstances etc.

  • 10 Anon // Mar 17, 2010 at 4:37 pm

    Ordinary Outcomes of Extraordinary Recklessness:
    http://www.hussmanfunds.com/wmc/wmc100315.htm
    (abit of a permabear so dont take every word verbatim).

    Current Sentiment:
    CBOE Call Volume 1.9
    Index vs Equity PC Ratio 0.5
    VIX 50-day ROC -17.9%
    Investors Intelligence Bulls 44.9%
    Investors Intelligence Bears 23.6%

    Yield Curve (50-Day ROC) -29.0
    SPX Price/Book 2.2
    SPX Pe Ratio 18.5

    Above not advice, just banter…get advice from a financial adviser etc that knows your circumstances etc.

  • 11 Ned S // Mar 17, 2010 at 6:23 pm

    I wasn’t following him closely enough when things were real vicious to definitely say it’s good Anon. But I figure he’s one to watch as I was pretty impressed by a writeup he did where he outlined his approach to investing. And the fact that he’s been on the right side of this bull for a good while at least. (He claims he was onboard in April 2009 – And like I said, I can’t dispute that.) And he makes pretty clear calls about what targets he is looking to act on.

    Plus that recent revelation impressed me – I’ve got to admit I had assumed he’d have a heavier exposure to stocks and commodities. (But he’s not a young bloke as he points out.) And also that while he is a Brit with no property in his portfolio, he’s got plans to pick some up. (The bulk of his cash is tied up for a while yet earning him respectable interest.) :

    http://www.marketoracle.co.uk/Article17891.html

    Thanks for the charts from cij re housing loans.

  • 12 Anon // Mar 18, 2010 at 8:06 am

    Geez we are up again!
    Looks like there was alot of short covering last night.
    89% of stocks in the SPX are now over their 50dma. At the start of this rally this figure was 18-20%.

    Above not advice, just banter…get advice from a financial adviser etc that knows your circumstances etc.

  • 13 Greg Atkinson // Mar 18, 2010 at 10:00 am

    Anon I reckon we will bounce around these levels for some weeks, maybe go up again before we have another scare and see the market come down a touch. I simply don’t see any news on the horizon that would send markets surging towards say 6000 any time soon.

    As for gold, it seems to be stuck at around the current price and in $AUD terms has done very little for around a year. But this doesn’t stop people trying to talk prices up!

    As for the U.S economy, has the recovery already begun I wonder or it is still bottoming out?

  • 14 Anon // Mar 18, 2010 at 1:56 pm

    Hmm….I remember reading somewhere the US government stimulus is at peak effectiveness, so from here onwards the US economy will need to stand increasingly on its own two feet. Just cant see that happening atm.
    So I guess i’m in the “bottoming out” camp. Its not getting worse but I dont see enough to justify these lofty valuations.

    Those PPI numbers (.6% fall) show defaltionary pressures taking hold. Can you imagine what the CPI and PPI would look like if there was normal levels of government stimulus and oil prices were more like 50$. What a shokka.

    Above not advice, just banter…get advice from a financial adviser etc that knows your circumstances etc.

  • 15 Anon // Mar 18, 2010 at 4:08 pm

    Domestic Demand contribution to US GDP growth (as at 15th Oct 2009)Tudor Group:

    10Q1 = 3-3.5%
    10Q2 = 5.5%
    10H2 = 1.5%

    So theres a cliff effect here. Might be ugly for markets towards the later half of the year (assuming reliable forecasts).

    Interesting forecast by Tudor on the Euro back in Oct 09:
    “The Euro is still perceived as the default alternative to the dollar, but fundamentals are less than supportive. Europe has several countries that will undergo profound deflationary and quantity adjustment.”

    Paul Tudor’s produced compound annualized returns of about 20% p.a. since the mid 80s? Or about 9,000-10,000% return on initial investment!

    http://www.scribd.com/doc/21753600/Tudor-Third-Quarter-Letter

    Above not advice, just banter…get advice from a financial adviser etc that knows your circumstances etc.

  • 16 Anon // Mar 19, 2010 at 12:22 am

    “March 18 (Bloomberg) — The index of U.S. leading indicators rose 0.1 percent in February, the smallest gain in almost a year, pointing to an economy that may expand at a slower pace in the second half of 2010. ”

    http://www.bloomberg.com/apps/news?pid=20601087&sid=amFBFX5pGN_g&pos=2

  • 17 Greg Atkinson // Mar 19, 2010 at 8:03 pm

    I think we can safely say that the U.S economy is not roaring back to an era of high growth. It just might be the U.S economy takes many years to recover…and who knows, it may never quite get back to where it was?

  • 18 Greg Atkinson // Jun 28, 2010 at 10:07 am

    Looks like some more people in Australia are talking about a gold bubble. Michael Pascoe the finance journalist and Rory Roberston from Macquarie Bank have finally caught up with me 🙂

    See: http://www.smh.com.au/business/gold-price-a-bubble-waiting-to-pop-20100628-zca1.html?autostart=1

  • 19 Firebug // Jun 28, 2010 at 12:00 pm

    Gold certainly appears toppy right now.

    But as for a bubble? It is not anywhere near where it was back in 1980 in real terms so the bubble call may be a little early.

    Gold is very volatile, wouldn’t surprise me if it corrects 20% H2 this year. It won’t surprise me either if it goes much higher two years later.

  • 20 Greg Atkinson // Jun 29, 2010 at 9:18 pm

    Firebug it is going to get interesting if the Chinese economy really does slow. The gold bulls would say that if this happens then this will drive gold prices higher, but I am not so sure.

    At the end of the day most gold being mined is heading into vaults so there is no shortage of the stuff. All it would take for gold to come crashing down is for a number of the smart players to shift out of it and into something else.

    Now if I just knew what they might move into! 😉

  • 21 Firebug // Jun 30, 2010 at 10:20 am

    I really don’t know the impact on Gold price when Chinese economy slows down. It may well turn out that Gold drops sharply as Chinese economy shrinks.

    However, my view is that the US economy will have bigger impact on Gold price. At this point, I do see Gold price rising.

    The use of Gold is not “consuming” it as much as it is used as a storage of value against risks. So when people shift our of Gold the price will crash down badly, like in the early 80’s. The crash will come too, if Gold does rise sharply.

    I reckon money will move out of Gold to buy stocks at some point, pity I can’t time the market…

  • 22 Biker // Jun 30, 2010 at 1:59 pm

    There’s no doubt that the usual EOFY sell-off is affecting the stockmarket here, Greg… but how much further do you think it might fall this year?

  • 23 Greg Atkinson // Jun 30, 2010 at 2:56 pm

    Biker I never quite understand why people leave it until the end of the FY to offload stocks and sell when most people seem to be doing the same. I tend to be a small buyer of stocks around this time of year…nothing serious, just a few stocks in companies I like.

    As for the stock market falling, well I actually think things will stabilise over the next 6 months or so and stocks will slowly head up again. Things aren’t as gloomy as they appear. Okay so the Chinese economy might be slowing down..it happens to all economies, but this doesn’t mean the end of the global economy. We all survived the bursting of the Japanese economic bubble right?

    Of course Europe is a bit of a mess and the US economy does not look great but many other large economies like Brazil, Indonesia and India seems to be still growing along with a whole range of emerging economies like Vietnam.

    So I think ASX stocks will hold up okay over the next 12 months, but I reckon the economy will not. This might sound strange but the Australian stock market has been trading at recession like levels for around 2 years so the air has already been let out of that bubble.

    However the rest of the Oz economy has been propped up by Government spending and commodities exports..but the impact of these on the economy is starting to wane. Unless something comes along to give the Oz economy another kick along then where else can it go but down?

  • 24 Biker // Jun 30, 2010 at 4:35 pm

    Recent opinion that China’s domestic economy can keep it buoyant, if correct, means that resource-based economies may continue to benefit, even if China’s labour costs increase.
    It’s likely that we’ll see some astonishing developments
    in China, now that individual initiative is rewarded.

    Three of the four emerging economies you’ve listed have cheap labour as an economic advantage, so they’re competitive globally.

    I’m struggling to align the concept of a failing economy with a rising stock market, to be honest.

  • 25 Anon // Jun 30, 2010 at 8:18 pm

    “So I think ASX stocks will hold up okay over the next 12 months, but I reckon the economy will not. This might sound strange but the Australian stock market has been trading at recession like levels for around 2 years so the air has already been let out of that bubble.”

    Thats spot on Greg. Warren has mentioned previously that the greatest stock market returns have been when the economy has been performing poorly…so he says using the economy to forecast what stock returns will be doesn’t work.

    The 2 and 5 year rule is a good start in regards to stock market crashes. But then it doesn’t always work either.

    Above not advice, just banter…get advice from a financial adviser etc that knows your circumstances etc.

  • 26 Anon // Jun 30, 2010 at 8:21 pm

    Should be 3 and 5 year rule btw…didn’t let me edit.

  • 27 Biker // Jul 1, 2010 at 12:29 pm

    Predictions I heard this morning on the ABC ranged from 4500 to 6000+ for the next twelve months. Commentator sniggered at that last guess.

    These figures are as reliable a forecast as the stuff I hear from MRD on property returns. They’re provided by salesmen.

    I’ve _no_ idea where the stock market will be in twelve months.
    Would we really have pegged a fall to 4200 after the last peak?
    I think there are just too many doubtful issues in play, including mining taxes, Europe and the US… .

    And what might _Labor_ have a grab at, next?

  • 28 Greg Atkinson // Jul 1, 2010 at 4:10 pm

    I wonder if I can delete the blog I wrote in September last year where I said the ASX All Ords/ASX 200 will be around 5500 in September 2010 🙂

    But I am not giving up yet 🙂 I am not surprised stocks have been hit by fears that growth in China may be slowing and I warned about this earlier in the year, but once again I think the sell-off has been overdone.

    Investors have been pretty easy to scare since the GFC, it doesn’t seem to take much to spook the markets these days either.

  • 29 Anon // Jul 1, 2010 at 5:21 pm

    Well they say you pay a high price for a cheery conensus and bright prospects! So as a value investor, uncertainty is great !
    This is very interesting to watch. The key here will be to hold your nerve on the drawdown and not let the media infect your thinking.
    I’m still bullish too, but wouldn’t be surprised if we did fall abit more. Still have 20% in cash -i’ll use that if prices really do get silly.

    5,500 still could happen Greg.
    I wrote this post on 17th March and everyone thought I was crazy 😉

    “Volume is anemic and cyclical companies earnings, the true measure of an economic recovery, all have been shocking. Toll off a cliff. I think we might have a range bound market abit like the post 87 crash or in the early 90s. In those situations we essentially did nothing for several years.
    I am looking at around 4,250 on XJO for re-entry

    Above not advice, just banter…get advice from a financial adviser etc that knows your circumstances etc.

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