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Yesterday (Thursday) the S&P rose 17 points (+0.42%) to 4,097, breaking out of the range it had traded in since the first hour Monday morning of 4,068 to 4,086. The move was once again led by Big Tech with the S&P Tech Sector ETF (XLK) +1.44%.
The move in Big Tech has been so powerful that the QQQ was 11% off its All Time Closing High on Monday March 8 but is now back to within 41 basis points of it. You can see this in the chart above with the horizontal blue line showing the All Time Closing High of $336.45 from February 12 (QQQ closed yesterday at $335.08).
Facebook (FB) is a great example of the kind of bounce back we’ve seen in recent weeks. From a closing low of $254.69 on Thursday February 25, FB has bounced 23% in the last six weeks closing yesterday 7 cents off its All Time Closing High from Wednesday at $313.02. You can see this in the chart in Grayson Roze’s tweet above.
The concern with Big Tech, as discussed Tuesday morning, is valuation. At that time FB was sporting a 29x Enterprise Value / 2020 Diluted EPS multiple. It’s now 30x and FB has a $905 billion market capitalization.
Next, I want to make the case for buying gold, and the precious metals generally, now. One big reason can be seen in the tweet above from Macro Charts. The two main gold ETFs, GLD and IAU, have just experienced the second largest outflows in their history. In other words, investors are taking their money out of gold to invest it elsewhere. When this reaches a certain level, everybody who wants to sell has sold and there are only buyers remaining creating the conditions for a bottom.
Second, gold has been acting well in recent days seemingly finding support at $1700 (see Yuri Matso’s tweet) and forming a double bottom (Kahn tweet). Brian G has a different perspective and is not interested in the GLD which is now running up against its declining 50 DMA. We’ll see how gold handles its 50 DMA but the precious metals and their miners have been showing life in recent days.
The question arises naturally from Mark Ungewitter’s tweet showing the Gold/SPX ratio since 1965: Why buy gold over stocks when the latter have have outperformed the former over most of the last 10 years?
This is where fundamentals come in. Take a look at the two tweets above from Holger Zschaepitz showing the Fed and ECB balance sheets. They have absolutely exploded higher in response to the coronavirus as the two central banks have pumped massive amounts of freshly created money into financial markets to prop them, and the economy, up.
As I’ve written about many times, if and as this money finds its way into the real economy, it will be inflationary, potentially massively so. I would argue that this is already happening as represented by rising commodity prices and interest rates. Further, the reopening of the economy as the coronavirus is contained by vaccination will lead to a large pick up in economic activity and this will boost inflation even further.
Inflation is gold’s number one fundamental as it a store of value against paper money devaluation. If my analysis is correct, the fundamentals for gold, and the precious metals generally, have NEVER been better.
While gold’s fundamentals are incredible right now, I would argue that stocks are in a bubble. As economist Daniel Lacalle points out in his tweet above, stocks are moving higher mostly due to multiple expansion from all this new money being pumped into financial markets, not earnings growth.
To sum up: While the technicals for gold are starting to look better, a pure technical approach would have to prefer stocks over gold presently. However, if you take a look at the fundamentals, I would argue that the reverse is actually the case with gold being the far superior investment at the moment.