Covid, Money Printing and Gold

MarketCycle Wealth Management

 

 

This month’s blog will entail some odds & ends, but it is mostly about Covid-19 resulting in endless “money printing” and the resultant rise in the price of gold.

COVID-19.  We’ll start by offending everyone.  Covid-19 is the 2019 version of the common mammalian coronavirus… a virus that wears a crown of spikes.  The common cold is a coronavirus.  This particular strain is worse because it likely jumped from a bat to a human (96% similarity between the strains).  It is more contagious than usual because it has developed sticky spots on its spiked crown and this allows it to more easily attach to a human cell.  And because it likely jumped from a bat to a human, it was also more lethal because it was fairly unrecognizable by the human immune system.

A virus is not alive… it is sort of like an un-manned space probe.  It contains genetic instructions but it has no life in it until it lands on a mammalian cell and enters and takes over the cell’s operation; only at this point does it become “alive.”  In March I stated that the virus did not want to kill its host, its only goal was to reproduce. I felt that it would become even more contagious but less lethal.  This is exactly what has happened.

The sticky spike recently developed a hook on it for easier attachment to its host’s cell membrane.  The number of new cases is obviously (and temporarily) going up, especially in the United States (and it is actually going up based on a percentage and has nothing to do with extra testing) but the percentage of people dying from Covid-19 is currently way below its peak and still falling.  It is more contagious but it has less strength with each passing day.  Currently, greater than 50% of the people that contract Covid-19 have zero symptoms.  Life is a gamble, but the odds are now moving in our favor.

I’ve written that actual death is caused by the human’s own immune system causing a cytokine storm that ends up destroying lung tissue (dead lung tissue stops the ability to breath) and that an emergency medical treatment would be found in the steroid family of drugs.  This is proving to be correct.  So, while a coronavirus vaccine has never worked and it will likely not work in the future (because the coronavirus mutates constantly and yearly), if one lands in the hospital, the simple solution is for the doctor to give common (inhaled and oral) steroids to stop the cytokine storm.  This easy and cheap solution (that MUST be done under a doctor’s care) is already showing its high success rate. It may take many doctors awhile yet to fully catch on to this mechanism of cause and treatment.

Do masks help?  Despite people’s strong political or philosophical opinions (and the willingness to come to fisticuffs in the aisles of stores and restaurants) the short answer is yes and this is because, while the virus itself is small enough to pass right through any mask, it is usually attached to a droplet and the droplet is too large to pass through the mask (in either direction).

Nuts?  Some of our global readers may not fully appreciate this, but the widespread acceptance of conspiracy theories in the United States is fairly robust.  Sinclair Broadcasting owns 40% of the television stations in the United States and this includes 40% of all local news outlets.  It is actually the leading provider of local news to Americans.  Sinclair Broadcasting, next week and across all of its stations, plans to air a 30 minute prime-time segment showing that Covid-19 was cooked up by Dr. Fauci, the well-known director of the National Institute of Allergy and Infectious Diseases.  Apparently, as a member of the “Deep State,” he developed Covid-19 in his kitchen and then flew the disease to Wuhan China where he released it into the air in order to attain world domination.  The footage has already been permanently banned from YouTube, Twitter and Facebook because it is obviously fake, but Sinclair Broadcasting is choosing to show the program as a factual documentary to its large audience.  Under protest, Sinclair is now being forced to add a casual disclaimer; perhaps at the last minute they will come to their senses and just block the showing.  And no, I’m not making this up.

What did I recently get incorrect?  I felt that Covid-19, like all other yearly coronavirus versions, would become dormant in the hot summer months.  I failed to consider that a huge number of people are staying indoors in air conditioning.  I take this as a personal reminder to consider all angles when developing an opinion and this applies to investing too.

Right now, all across the globe, people are still refusing to leave their house, but the coronavirus will likely never go away (although it is likely to become weaker over time).  Never is a long time to remain house-bound.  And hopefully people will gain the courage to leave their homes before their favorite businesses disappear from a lack of support.  As for me, I’m out & about and even back in the gym… and I do wear a mask whenever appropriate.  Every day of life is a risk, both before and after Covid-19, and with the recent mutation (of weakening), the odds are now moving in our favor.  

 

 

Chart gaps?  I recently wrote that the S&P-500 price chart had produced two gaps and that the lower one would be filled within 30 days, which it did, and that the higher one (created in February 2020) would be filled within one year.  It now looks like it will be filled before Christmas.  This is very bullish for stocks.  I expect to see the S&P-500 @ 3550 by early in 2021.  I keep telling clients to put this on their refrigerators:  “Dow 80,000 by 2029.”

 

What asset is undervalued and leading in strength relative to the United States stock market?  China.  Because of the extreme level of accounting fraud in Chinese companies, I would only suggest large-cap Chinese stocks that trade on exchanges outside of China.  I have my eyes on a very particular Closed-End-Fund that also pays 9.5% interest on top of price gains and we will likely move our clients into an allocation of this when our Treasury-bonds finally show signs of cracking.

 

Unemployment (initial claims) is steadily falling from truly horrible levels (chart courtesy of CNBC):

 

A mini-bubble formed in technology stocks?  In our prior blog, MarketCycle suggested that tech would either drop or move sideways as other sectors of the economy played catch-up.  The next day and right on cue, tech stocks began to lag (and they continue to lag as I post this article).  However in my opinion, longer-term (along with innovative healthcare) tech stocks will ultimately lead the stock market higher over the next 9 years.

 

 

Covid-19 leads to economic weakness… which leads to money printing… which leads to inflation… which leads to a rise in the price of GOLD:

 

Gold is in a bull market of its own.  One year ago, in June of 2019, gold broke out of its 6 year sideways trading range because it anticipated a coming rise in inflation some 10 months later; assets are always forward looking and they price themselves based on what they see on the horizon.  Near the breakout, MarketCycle bought a 6-7% allocation to physical gold.  We entered the trade via a Canadian Trust that holds actual gold in its vaults and that creates capital gains taxes that are half the amount of those created by the ETFs centered in the United States, and this trust has no complicated K-1 tax form to deal with.  Now, everyone is touting gold and people are suddenly pouring into this trade.  Some are moving into silver, which has been called “the poor man’s gold.”  This is all centered around the “too much money printing” mantra.

“Money printing” to pull us out of the 4 week pandemic crash is now 3x higher than it was with the year long financial crash in 2008.  More (digital) dollars in circulation means that each individual dollar (USD) is worth less because dollars are less scarce.  Since gold is priced in USD, it then takes more dollars to buy each ounce of gold.  Ultimately, more USD in circulation causes inflation to rise and inflation causes the gold price to rise.  Gold cannot be printed.  However, there is more to the story.  Inflation is actually caused by the VELOCITY of the money that has been injected into the system.  If a lot of USD are created, but they are not moving through the economy, then there is no real inflation and this is actually where we are today.

Gold is extremely volatile.  The swings both up and down can be excessive.  Traders delight when it rapidly moves up and then panic when it plummets down.  As with stocks, most investors buy high and then sell low, losing their hard earned money in the process.  Before buying an asset, investors must always ask themselves:  “Am I one of the first people to think of this idea, or is it common knowledge that is already built into the current asset price?”

Right now, gold is extremely overbought, pushing up against overhead resistance and it is ripe for a bigger pullback (see the chart of gold above).  The pullback may not be immediate, but it is certainly coming.  Longer term, we are fully bullish, but we will maintain a smaller 6% allocation until inflation actually heats up… and this might take years.

Gold is a much better portfolio diversifier than is silver.  Physical gold is also a better portfolio diversifier than are gold mining stocks since gold stocks more closely follow the general stock market up and down.  A stock always acts like a stock.  I am not saying that gold stocks are bad (especially the junior miners), I am just saying that they offer less portfolio diversification than does physical gold (right now, gold stocks are less overbought and they offer more leverage).  Physical gold hedges market risk better than do gold stocks because physical gold can and often does act counter to stock market moves.

If you look to the far right on the following chart of CPI inflation levels, which are near historic lows, it may make the case that the recent extreme run up in the price of gold may be based more on herd behavior than on actual economic conditions.  And we also have to remember that gold is currently overbought and ripe for a sell-off.  Again, gold is an inflation loving asset.  MarketCycle’s proprietary inflation indicators show that inflation began to pick up in April, four months ago, but from such extreme low levels that markets currently still embrace deflation risks.  (Chart courtesy of Charles Schwab):

 

 

With all of the worry around Covid-19, what are the steps for setting up an ESTATE PLAN?

  1. Set up a LIMITED ‘power-of-attorney’ for both financial and for medical (using two different people) so that decision making will proceed when you cannot do it yourself.  Do not let a court proceeding do this for you.  You can get templates online.  As my friend Virginia slowly taught me some years back, a Google search is a wonderful thing.
  2. Write a ‘living will’ in order to provide end-of-life medical guidance.  You can get templates online.
  3. Write a ‘last will and testament’ in order to clarify your estate and to predetermine the guardians of any minor children.  You can get templates online.
  4. Consider setting up a ‘trust’ if your estate is large; the cost is normally several thousand dollars (and with some ongoing costs).  Do not do this online.
  5. Review your estate plan every 3-5 years and after any major life event such as marriage, divorce, birth of a child, or a home purchase.

 

A recent short email reply to a reader about creating a will online:

 

NOTE to clients:  Any new clients, or established clients that have recently sent additional money into their accounts, this new money will be allocated to positions when we get a sell signal in our Treasury-bonds.  We are using a ‘GTC sell-stop-limit’ just below rising support on these Treasuries in order to lock in our gains, so this is likely to happen sooner rather than later.

 

If you like what we do, then please pass a good word along to your friends and family!  We do not advertise and exclusively depend on your referrals.  Our clients can be found all across the globe.  We do turn away some people that are not a good match, but when we add a new client it in no way alters our level of effort toward our current clients.  The goal is that everyone gets 100% of our effort.

When I was in practice and in an extremely busy clinic just outside of Boston Massachusetts, people would commonly ask me how many patients I see in a typical day.  My factual answer was always the same:  “I see only one person… when I am in the room with someone, they are my only patient.”  That may sound egotistical, but a number of former patients are now current clients of MarketCycle and I believe that they would concur.

 

 

 

MARKET CYCLE  —  DUAL MOMENTUM  —  LOW VOLATILITY  —  TREND FOLLOWING  —  HEDGE FUND

 

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MarketCycle Wealth Management | Stephen Aust
MarketCycle Wealth Management, LLC is a Registered Investment Advisor. Information presented is for educational purposes only, is not considered an individualized recommendation or personalized investment advice, may not be suitable for everyone and does not intend to make an offer or solicitation for the sale or purchase of any securities. All investments involve risk and unless otherwise stated, are not guaranteed. Past performance or performance charts are not a guarantee of future performance. Portfolio performance charts are shown net of fees so the management fee, brokerage fees, trading fees and ETF fees have already been subtracted. Current performance may be higher or lower than that shown and differing accounts may show different results. Investment returns and principal value in client accounts will fluctuate. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Be sure to consult with a tax professional before implementing any investment strategy.