The 'Cocktail-Party Indicator' Doesn't Doom This Bull Run
When your friends and co-workers start chattering about markets, you need to start paying attention...
It usually means the trade they're talking about is getting too popular. And a correction could be on the way.
My colleague Whitney Tilson described this phenomenon in a classic issue of DailyWealth. He calls it the "cocktail-party indicator"...
Whether it's your trainer at the gym, a neighbor who has never shown any interest in the markets, or the proverbial shoeshine guy... When you hear these folks talking about how much money they've made in bitcoin, 3D printing companies, or the latest hot IPO... run, don't walk, the other way.
I've found, again and again, that when the least knowledgeable investors among all of the people I know are piling into whatever is hot, it's usually very near the top of a bubble.
This cocktail-party indicator just flashed for two of last year's biggest winners. But as I'll explain, it's not a sure sign the bull run is over...
Gold and silver shared a blistering bull run last year, surging 79% and 213%, respectively.
That's a massive move for both metals. But then last week, our Editor-in-Chief Sam Latter brought something troubling to my attention...
Sam's friend – who doesn't work in finance – texted him, "I hear people talking silver and gold at work. People with no business talking about either."
Folks, this is the cocktail-party indicator at work. People completely disconnected from metal markets are talking about the massive gains in spot prices... as if they're experts.
It's a warning sign... And investors should take it seriously. But it also doesn't mean these rallies are doomed to total collapse. Let me show you why...
Gold and Silver Have Room to Outperform Stocks
Gold and silver are still surging to all-time highs today...
Gold prices are within striking distance of $5,000 an ounce. And silver broke above $96 an ounce last week – after surpassing $50 an ounce for the first time ever in October.
With price moves like these, it's no wonder everyone's buzzing about precious metals. And it's true – gold and silver are likely due for a breather.
But a strong body of evidence suggests that both metals have room to continue their long-term boom...
We can see the health of both silver and gold by comparing their performance with the U.S. stock market.
We'll start with the gold-to-stocks ratio. When this ratio is on the rise, gold is outperforming the stock market... And when it falls, it means stocks are beating gold.
This ratio climbed throughout the early 2000s gold rally, reaching a peak of 1.67 in August 2011. But then, stocks took the lead over gold, and the ratio crashed until 2021.
Today, the ratio is finally climbing again. And based on its previous highs, it's still nowhere near its peak. Take a look...
You might think gold has nowhere to go but down right now. But the gold-to-stocks ratio shows this rally is still just getting started.
The same is true for silver...
We'll once again use U.S. stocks as a yardstick for prices. As a reminder, when the silver-to-stocks ratio rises, that means silver is beating stocks.
Today, this ratio is on the rise. But like the gold-to-stocks ratio, it's still well below its 2011 peak. Take a look...
Based on cocktail-party chatter, yes, a short-term dip might be coming for precious metals... But such price action would likely be healthy. The evidence shows we're nowhere near a valuation peak today.
Folks are taking notice of gold and silver. And after such a hot run to the upside, a cooldown could be on the way.
But I'd encourage investors to stay long on precious metals today. Gold and silver have room to run... And a dip from here will just create more momentum for even higher highs.
Good investing,
Sean Michael Cummings
Further Reading
"This isn't a short-term phase," Nick Hodge writes. We're in the early innings of what could be a major commodities bull market. This could be one of the best setups for resource investors in a generation – and the market is finally waking up.
"Right now, you might be falling for the three most expensive words in investing," Brett Eversole says. Too many folks fall into the "I missed it" trap just because an asset has rallied. But if you want to succeed as an investor, you need to focus on the trend instead of relying on your instincts.
Market Notes
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
Grupo Cibest (CIB)... Colombian bank
Interactive Brokers (IBKR)... online brokerage
Gilead Sciences (GILD)... biotechnology
Nutrien (NTR)... fertilizer
ExxonMobil (XOM)... oil and gas
Baker Hughes (BKR)... energy
Agnico Eagle Mines (AEM)... gold
New Gold (NGD)... gold
Royal Gold (RGLD)... gold royalties
Newmont (NEM)... gold miner
First Majestic Silver (AG)... silver
Orla Mining (ORLA)... precious metals
Wheaton Precious Metals (WPM)... precious metals
Coeur Mining (CDE)... precious metals
Northrop Grumman (NOC)... "offense" contractor
Lockheed Martin (LMT)... "offense" contractor
NEW LOWS OF NOTE LAST WEEK
American International (AIG)... insurance
HP (HPQ)... digital utilities
Paychex (PAYX)... payroll solutions
McCormick (MKC)... spices