Stewart Thomson Says Gold Faces Temporary Weakness as Debt and Valuation Risks Build

Stewart Thomson

Over the past few months, gold has generally moved sideways, with a modest downward bias, against U.S. fiat currency. Thomson says the decline has been driven by weaker demand from central banks and Indian citizens.

He links that softer demand to the Iran war, calling it a temporary effect and saying investors will need patience because it will take time for the energy supply crisis to end.

Thomson argues that the world’s debt problems are worsening, especially for governments. He says that as the energy crisis eases, those debt problems will again become the main driver for gold, because the metal tends to draw attention when confidence in fiscal stability weakens.

He adds that U.S. citizens carry less debt than the government, but warns that if stock and real estate markets were to collapse, unemployment could rise sharply and push debt much higher for both governments and households.

Based on the Shiller/CAPE inflation-adjusted price-to-earnings ratio, Thomson says the U.S. stock market is now more overvalued than it was at three of the past four major bull-cycle peaks. He says that is happening while government debt reaches unprecedented levels.

He also points to a Nasdaq ETF chart and says some large-cap stocks have rolled over, leaving the broader market looking shaky. In his view, money appears to be moving to China, where the CAPE ratio is below 20.

Thomson says investors who buy at high prices in hopes of even higher gains may eventually need to sell to protect profits, or risk large drawdowns. By contrast, he argues that buying low reduces the pressure to sell, even if it does not guarantee sustained wealth.

He says there is significant value in the Chinese stock market and very little value in the American market. He also notes that Chinese citizens have a long history of celebrating stronger stock market periods by buying gold. In the past, some of that exposure was taken through leveraged paper products and later lost in drawdowns.

According to Thomson, regulators have recently banned a large amount of leveraged gold trading for retail investors while encouraging purchases of physical metal. He says the new rules should increase the amount of gold held in physical form and kept that way.

Turning to gold’s short-term setup, Thomson says it is unclear whether the metal is breaking out or forming a bear rectangle. He says the next move of about $200 is likely to be decided by tomorrow’s Fed meeting, Thursday’s PCE inflation report, and Friday’s Bank of Japan meeting.

He says the $4,100 to $3,900 range was and remains a key buy zone. He also says gold, silver, and mining-stock investors should be prepared to buy if the metal falls to another key buy zone at $3,500.

Even so, Thomson says the odds still favor a move to $4,400 and then $5,000 rather than a decline to that lower level.

On a weekly chart, he says key buy zones are highlighted along with the 14,5,5 stochastic oscillator. He says a significant crossover buy signal appears imminent and notes what he describes as a bullish hook in oversold territory.

Thomson says investors need to focus on the bigger picture because inflation, war, a highly overvalued U.S. stock market, heavy debt, and an empire transition are shaping the investment environment.

He argues that raising rates will not solve oil shortages in many parts of the world, though it would slightly reduce demand in regions without shortages. He says central banks should now be raising rates aggressively not to fight the modest inflation faced by most citizens, but to curb what he calls governments’ debt obsession.

If central banks refuse to raise rates now, Thomson warns that a larger government-driven inflationary wave will later hit citizens, and perhaps not much later.

For gold investors, he says that wave is likely to coincide with falling U.S. stock and bond markets, a rising Chinese stock market, stronger gold and silver bullion, and sharply higher miners.

He adds that the free market is already pushing long-term bond yields higher regardless of central bank policy. In his view, many governments are effectively deadbeats that should face very high borrowing costs on their debt.

Looking at a GDX daily chart, Thomson says a bullish coil or wedge is in place and that pre-Fed trading is completing a small inverse head-and-shoulders pattern at the base of the coil. He also points to a bullish divergence between RSI and the GDX price.

He says another positive divergence is emerging as the Chinese stock market, measured by the FXI ETF, begins to rally. Thomson concludes that the 1970s, on steroids, is likely to become the world’s main financial theme, which he calls the ultimate gold bug dream.

Thanks!

Cheers

St

About the author

Stewart Thomson

Stewart Thomson is a retired Merrill Lynch broker. He writes the Graceland Updates daily between 4:00 a.m. and 7:00 a.m., and they are sent out around 8:00 a.m. to 9:00 a.m. The newsletter is attractively priced and uses a unique numbered point-form format, providing clarity and saving reading time.

Risks, Disclaimers, Legal

Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualified investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line: Are You Prepared?