Get Ready for More Selling

Doc Eifrig: Get ready for more selling... Why a double-digit correction is now likely... A super-bullish sign for precious metals... These charts say the next great gold boom is here...

Regular Digest readers know we're getting cautious again...

As we explained last week, the recent stock market sell-off has coincided with a number of troubling signals. From the August 7 Digest...

When we consider the evidence – a "panic" into the government bond market, spreading yield curve inversion, foreign currency and commodity weakness, and a relentless rally in gold – we can't help but reach an uncomfortable conclusion...

In short, it appears the market is now discounting a global recession... a burgeoning debt crisis... or possibly both. In any case, a new bout of market trouble could be approaching.

Now, as we noted at the time, we're not getting too bearish just yet...

Several measures of the economy – like employment – remain relatively strong. And we're not yet seeing obvious signs of trouble in the corporate bond market. For now, history suggests we should continue to give this long bull market the benefit of the doubt.

However, this doesn't mean we can't see further market weakness in the near term. In fact, given the short-term extremes we noted earlier this month, we wouldn't be surprised if stocks suffered another sharp correction like the one we saw last fall.

Our colleague Dr. David 'Doc' Eifrig agrees...

In fact, as he explained in his latest issue of Retirement Trader on Friday, he believes a correction could be more likely than not...

We want to focus on what happened [last] Monday. That's when things got really ugly for investors...

First, the Chinese government announced that Chinese companies would suspend any purchases of U.S. agriculture products. This was clearly a shot at President Trump.

Second, China let its currency, the yuan, drop to its lowest level versus the dollar in more than a decade. A drop in a currency's value makes the country's products cheaper on the international market – a move designed to lessen the impacts of tariffs.

The Dow Jones Industrial Average was down about 950 points intraday this week before it moved back up to finish the day down 750 points. The S&P 500 finished down 3%.

As Doc noted, broad market indexes like the S&P 500 aren't supposed to fall 3% in a single day...

It's made up of 500 of the biggest stocks from all different sectors. It's about as diversified as you can get in the stock market. So when big drops like these occur, it tends to be meaningful. More from Doc...

We looked back at previous times the market fell 3% or more to see how the market reacts over the following weeks. As it turns out, things don't look good from here...

Over the last 10 years, the S&P 500 has had daily moves of 3% or more just 19 times...

Out of those 19 one-day declines, 16 of them have occurred within a broader market correction – essentially a market decline of 10% to 20%.

In other words, only three of these one-day declines of 3% or more did not coincide with a larger market correction...

And again, this sample was just from the last 10 years, during one of the strongest bull markets in history.

However, as Doc noted, even these three exceptions weren't great news for stocks. More from the issue...

When those three occurred, they were part of a sizeable market sell-off, despite being below 10%.

For example, stocks fell 3.1% on February 4, 2010. Although there was no official correction during this date, it did take place during an 8.1% market drop from mid-January to February 8 – pretty darn close to a correction.

The chart below shows all the 3% or more one-day drops in the S&P 500 during the last 10 years...

As of midday trading today, the S&P 500 has fallen a little more than 4% from its July 26 high so far. Based on history, Doc says we should be prepared to see another 6% or more in the weeks ahead.

Of course, as we like to say, there are no guarantees in the market...

But Doc noted that there are few fundamental reasons to expect this time to be different. There's simply not much coming up that might be a positive tailwind for stocks:

• We're unlikely to make any significant progress toward a trade deal over the next few weeks. Sentiment might improve – it can't get much worse. But the U.S. and China are still far apart on key issues.
• The Fed doesn't meet for another five weeks, so we won't know its plans with interest rates until then.
• Corporate earnings season is mostly done.

It all comes down to expectations from here. Expectations of what might happen with trade, what the Fed might do, and if we're close to a recession or not...

We'll be the first to say we hope history doesn't repeat itself, and we avoid a harder correction. Ideally, we'd have stocks going steadily up forever... But that's unrealistic. We know market pullbacks are part of the game.

Switching gears, regular readers know we've been practically begging folks to buy precious metals for months...

In fact, it was nearly one year ago that we told you several signs were pointing to a major bottom in precious metals.

Since that notice, gold is up more than 25%. But despite this move higher, we remain incredibly bullish on the long-term prospects for gold and silver today. As we noted in the Digest last week...

We've been following the big breakout in gold for months now. But this move appears to be strengthening. As you can see in the long-term chart below, gold touched a fresh six-year high above $1,500 an ounce this morning...

This chart is undeniably bullish...

But it isn't telling the whole story.

You see, it represents the price of gold only in U.S. dollars. And while gold prices are typically quoted in U.S. dollars, it's important to remember that gold isn't only traded here in the U.S. It's a global asset that is bought and sold around the world.

As we often say, there are two sides to every price. On the one side, you have the asset being measured... which in this case is gold. On the other, you have the unit of measure... in this case, the U.S. dollar.

To really understand what's happening when prices move, you need to understand what's happening on both sides of the price.

For example, rising gold prices could mean that gold itself is going up in value. But it could also mean that the U.S. dollar is simply falling in value, or (as is often the case) some combination of the two.

As a result, it can often be useful to look at gold priced in other major currencies as well...

The following chart shows gold priced in the euro, the most widely traded currency behind the U.S. dollar...

As you can see, the gold rally has been even stronger in euros. While gold remains about $400 below its 2012 all-time high when priced in dollars, gold is less than 10% from a new high in Europe.

The next chart shows gold priced in the Japanese yen. While it remains below the all-time high set back in 1980, it recently broke out to a fresh multidecade high...

Gold has already broken out to a new all-time high when priced in the British pound sterling...

It's also made a dramatic new high versus the Australian dollar...

And we could show you similar charts of gold priced in the Canadian dollar, the Swedish krona, the New Zealand dollar, the Mexican peso, the Norwegian krone, the Turkish lira, the Russian ruble, the Indian rupee, the Brazilian real, and the South African rand.

All told, gold has broken out to a significant new high in 13 of the world's top 20 currencies...

And again, it's also close to breaking out to a new all-time high in the euro, the world's No. 2 currency.

This is a big deal...

Gold has broken out to a multiyear high here in the U.S. But as bullish as this price action has been, it's not telling the whole story. A relatively strong U.S. dollar has concealed the true strength in gold over the past few years.

The latest rally in gold has been a global phenomenon... and that's one more indication that a new bull market is underway.

Of course, this doesn't mean gold will move in a straight line higher from here...

Even the strongest bull markets suffer periodic – and sometimes sharp – corrections. And as we noted on Friday, there are signs that precious metals could take a "breather" soon.

If you've already followed our advice to allocate at least 5% to 10% of your portfolio to precious metals, we suggest waiting to make significant new purchases at this time. You'll likely have the chance to buy at better prices in the weeks ahead.

However, we'll repeat our warning: If you don't yet own any precious metals, we urge you to consider taking a small initial position today.

The evidence suggests a new bull market is underway... and we believe the risk of not owning any precious metals is far greater than paying too much.

We'll also remind you that if you're looking for more guidance in building a balanced gold and silver portfolio, you don't want to miss next week's big event...

Legendary gold stock analyst John Doody is officially joining the Stansberry Research team.

And to celebrate, John will be joining us live to share his latest thoughts on gold and silver... including the name of one little-known investment he believes could soar 500% or more in the coming months. You'll even have the chance to walk away with more than $20,000 worth of gold coins, just for showing up to this FREE event.

Click here to learn more and reserve your spot now.

New 52-week highs (as of 8/9/19): Axis Capital (AXS), Corteva (CTVA), Hershey (HSY), Invesco Value Municipal Income Trust (IIM), McDonald's (MCD), NovaGold Resources (NG), Nestlé (NSRGY), Nuveen Municipal Value Fund (NUV), Polymetal (LSE: POLY), Royal Gold (RGLD), Stryker (SYK), Wheaton Precious Metals (WPM), and Aqua America (WTR).

In today's mailbag, another reader has a question about holding cash. What's on your mind? Let us know at feedback@stansberryresearch.com.

"You keep saying to 'hold plenty of cash.' What does this mean? No really. Are you saying to keep a huge pile of it at home (I can't do that!), or in my savings and checking accounts? What if one has different banks, should the 'cash' be split amongst them? Seriously, I am puzzled. Your site is always informative. Learning new ideas is important to me. Keep up the great job. Thank you very much." – Paid-up subscriber JoAnn M.

Brill comment: Thanks for the question, JoAnn. As always, we're unable to provide individual investment advice. But we fear you're overthinking it...

In general, we recommend holding the bulk of your cash in an FDIC-insured account at a major bank. However, the current FDIC coverage limit is $250,000 per depositor per bank. So if you're talking about a lot of money – say, in excess of half a million dollars – you might consider putting some of it into the shortest-term U.S. Treasury debt, known as Treasury bills or "T-bills." This is simply to avoid the hassle of dealing with accounts at multiple banks.

Depending on your circumstances, you might also consider holding some cash outside of the banking system in a safe (ideally outside your home or personal residence).

Finally, if your cash position is in a 401(k) where T-bills are not an option, we would generally recommend looking for the shortest-duration U.S. Treasury bond fund from the most reputable provider you can find.

Regards,

Justin Brill
Baltimore, Maryland
August 12, 2019