Gold: The Contrarian Viewpoint

gold bear and bull on stock charts

When the Fed made its surprisingly hawkish announcement yesterday, gold returned to its lowest prices since early February. At the same time, the dollar rose to a 14 year high. Though the stock market took a brief dip, it has bounced back today.

One theory has been that, should gold break the $1,140 support, prices will likely plummet toward $1,000. Does this mean the gold bull market is dead?

As the Dow inches ever closer to the 20,000 mark, the term “irrational exuberance” began to resurface. Prices seem to be buoyed by the expectation that a Trump presidency will stimulate economic growth, rather than economic havoc, as previously expected. However, there seems to be some evidence to the contrary.

  • Fed Hike – Hawkish measures exist specifically to slow growth. Furthermore, both the housing and auto markets are constricted by higher rates.
  • Strong Dollar – While tourists abroad may be loving the current exchange rates, there is no question that industrial growth and exports are both dragged down by a strong dollar.
  • Aging Bull Market – The current bull market is 7 years old, and the S&P 500 is up 229% with sky high 20x P/E (price-to-earnings) ratios. A lot of very smart people think the fundamentals are at least somewhat lacking to account for these heights.

And last, a little glance backward for some historical context.

Back in November, the Dow Jones Industrial Average, S&P 500 and the Russell 2000 Index each hit all-time highs at the same time. The last time this unlikely event occurred was on December 31, 1999.

Additionally, the best ever stock market performance between a presidential election and inauguration was when Herbert Hoover was elected. He was inaugurated on March 4, 1929.

In case those dates didn’t ring a bell, both of those events were followed by two of the worst stock market crashes in history. While past performance is never a yardstick of future results, for contrarians, the current situation may actually be starting to look like a buying opportunity for gold.