A New Warning About Gold

Good news from Hong Kong... The latest on the trade war... Why we're still not holding our breath for a deal... A new warning about gold... It's time to prepare for a pullback...

U.S. stocks rose today following some positive headlines out of Hong Kong last night...

In short, after months of unrest, the country's leader Carrie Lam announced that her government would now withdraw a proposed bill that would have allowed Hong Kong citizens to be extradited to mainland China for trial.

This withdrawal was one of the five key demands of the protestors. So the news was seen as a sign that the protests – one of the biggest geopolitical worries in the world right now – could soon ease. But that may not be the case just yet. As news service Reuters reported...

Many are furious about perceived police brutality and the number of arrests – 1,183 at the latest count – and want an independent inquiry...

"The damage has been done. The scars and wounds are still bleeding," said pro-democracy legislator Claudia Mo. "She thinks she can use a garden hose to put out a hill fire. That's not going to be acceptable."

Others said the move was not enough, many on street corners after nightfall shouting: "Five demands, not one missing."

"We still have four other demands. We hope people won't forget that," said Ms. Chan, speaking for the protest movement and not giving her full name. "The mobilization power won't decrease."

However, a much bigger risk to the markets continues to grow...

We're referring to the ongoing trade war between the U.S. and China.

Regular readers know tensions suddenly re-escalated early last month, when U.S. President Donald Trump announced a new round of tariffs on Chinese imports.

These were originally supposed to be 10% tariffs on an additional $300 billion of Chinese imports. But the president then raised them to 15% after China announced new tariffs of its own a few weeks later.

Well, the first wave of these tariffs officially went into effect over the weekend...

And unlike previous measures, these tariffs are likely to hurt U.S. consumers directly. As Bloomberg reported on Sunday...

While 82% of intermediate inputs are already affected by tariffs, just 29% of consumer goods have had levies to date. That figure will now rise to 69%, and 99% when a final tranche is imposed on Dec. 15, according to the Peterson Institute for International Economics.

The Trump administration – or at least its trade representative, Robert Lighthizer – has recognized the risk of bringing the trade war to consumers' pockets. The current total-war scenario, with tariffs imposed on almost the entirety of imports from China, was first threatened more than a year ago, but Lighthizer has worked hard to excise the sorts of goods purchased by price-sensitive shoppers from his product lists.

The latest escalation means that sort of strategic precision is no longer possible. Around the country, apparel retailers have already worked out where best to jack up prices, while toy shops and sporting-goods stores will be doing the same ahead of the post-Thanksgiving tranche.

These new tariffs will apply directly to thousands of products sold at major U.S. retailers like Walmart (WMT), Target (TGT), and Amazon (AMZN) – including clothing and footwear, electronics, appliances, furniture, and plastic goods. And according to research from investment bank JPMorgan Chase, these "hidden taxes" will cost the average American household more than $1,000 per year.

Of course, those estimates assume the trade war doesn't escalate even further...

While we continue to hope cooler heads prevail, we see little evidence that either side is interested in reaching a compromise soon.

Just yesterday, President Trump reaffirmed his tough stance in a series of tweets...

We are doing very well in our negotiations with China. While I am sure they would love to be dealing with a new administration so they could continue their practice of "ripoff USA" ($600 B/year), 16 months PLUS is a long time to be hemorrhaging jobs and companies on a long shot...

And then, think what happens to China when I win. Deal would get MUCH TOUGHER! In the meantime, China's supply chain will crumble and businesses, jobs and money will be gone!

For all of the "geniuses" out there, many who have been in other administrations and "taken to the cleaners" by China, that want me to get together with the EU and others to go after China Trade practices remember, the EU & all treat us VERY unfairly on Trade also. Will change!

Meanwhile, earlier in the day, Chinese President Xi Jinping gave a speech urging the communist government to prepare for "long-term" struggles against a number of threats. From a separate Bloomberg report on Tuesday...

Xi said officials needed to display a "fighting spirit" to overcome challenges ranging from security concerns to financial risks, according to the official Xinhua News Agency. "The struggles we face will not be short term, but long term," Xi told a cadre training course Tuesday in Beijing, adding that difficulties would persist through at least 2049, the 100th anniversary of the People's Republic of China...

"At present and into the future, China's development is entering to a period when various risks and challenges are emerging together," Xi said, listing concerns including the economy, defense, Hong Kong and Taiwan. "And it will only get more complex."

The speech was followed up Wednesday by a toughly worded front-page commentary in the party's flagship People's Daily newspaper, which chided "some cadres, especially the young ones" for lacking the necessary fighting spirit. Some were "weak-kneed and unwilling to fight," the commentary said, adding that such a political party or country wouldn't be "far from peril."

To be clear, Xi didn't specifically mention the U.S. or the trade war, but he certainly didn't sound like a man who intends to give in to the White House's demands.

Again, we certainly hope that the U.S. and China can come to an amicable resolution sooner rather than later. But we're still not holding our breath.

Finally, regular readers know we've been incredibly bullish on gold and silver...

It was a little more than a year ago that we first told you that several signs were pointing to a major bottom in precious metals. And we've practically begged you to own some again and again in the months since.

The reason is simple... For the first time in years, everything has lined up for significantly higher prices. We reviewed this setup in the August 9 Digest...

Gold has long been the ultimate "chaos hedge," as our colleague Dr. David "Doc" Eifrig likes to say. Between the ongoing trade war, geopolitical tensions, and new signs of economic weakness, global uncertainty is surging.

Gold traditionally has also been one of the best defenses against monetary "shenanigans"... And after showing some small signs of restraint over the past couple years, the Federal Reserve and other central banks are suddenly full-on "dovish" once again.

This shift has resulted in an explosion in negative-yielding debt, which just passed a mind-boggling $15 trillion this month...

Finally, in addition to positive fundamentals, gold's "technicals" are looking positive as well... After five years of failed attempts, gold finally staged a major breakout in June when it soared above $1,400 an ounce. Gold has continued its uptrend since then, touching $1,500 earlier this week. And silver now appears to be breaking out, too.

The rally has continued since then...

In fact, both gold and silver hit fresh multiyear highs today. Gold touched a fresh six-year high above $1,550 an ounce, while silver rallied above $19.50 an ounce for the first time in three years.

We continue to believe significantly higher prices are likely over the next several years.

However, in recent weeks, we've also been warning you that the odds of a correction – and potentially a sharp one – are rising.

Our biggest concern has to do with sentiment...

In short, some of the most reliable sentiment measures we follow are hitting extremes that typically precede at least a short-term pullback.

One of these measures is the weekly Commitments of Traders ("COT") report, published by the U.S. Commodity Futures Trading Commission. The COT shows the real-money bets of different groups of traders in the futures markets.

We pay particular attention to what speculative traders – also known as the "dumb money" – are doing. These folks are often wrong at extremes. When they get extremely bullish, it's typically a bearish signal for the market, and vice versa.

In that same Digest last month, we shared research from our colleagues Ben Morris and Drew McConnell noting that speculative traders were already extremely bullish on silver.

Unfortunately, these extremes have only continued to grow since then...

As Ben and Drew noted to their DailyWealth Trader subscribers this morning, speculators are now extremely bullish on gold, too...

In the COT chart for gold below, you can see that speculators hold more bullish positions in gold futures (the blue line) than ever before...

As we've noted before, this doesn't mean that the big rally in precious metals is over.

Nor does it mean that a correction will begin tomorrow. But it does suggest that a pullback is likely... and it could begin at any time.

But this isn't the only warning sign Ben and Drew noted this morning...

Another reliable indicator is close to triggering a short-term sell signal as well. More from Ben and Drew...

The bullish percent index ("BPI") for gold miners is also at a rare extreme... The BPI tracks the percentage of stocks in a sector that are trading in a bullish pattern. It ranges from zero to 100.

The BPI flashes a buy signal when it drops to 30 or lower (oversold territory) and then turns higher. And it flashes a sell signal when it reaches 80 or higher (overbought territory) and then turns lower.

In the chart below, you can see that the gold miners BPI fell below 20 at the end of last year. It was deeply oversold. Then it turned higher in late December. And recently it has soared to its highest levels since 2016...

As they noted, the gold miners BPI hasn't turned lower yet...

So it has not yet triggered a sell signal. And it could head even higher – like it did in 2010 and 2016 – before it finally turns lower.

But like the COT, it suggests the chances of a correction are rising. And Ben and Drew believe it's a good reason for caution today...

The gold miners BPI hasn't turned lower yet. But it has been flat, at 87.5, for a full month.

Does the market have enough buying power to push more gold stocks higher? Maybe, but we're not betting on it. More likely, the gold miners BPI will turn lower soon and give us a sell signal.

Either way, though, the BPI shows that sentiment toward gold stocks is extremely bullish. The last two times the gold miners BPI reached levels this high were in November 2010 and July 2016. In both cases, gold stocks had sharp pullbacks over the next few months.

Now, let us be clear...

As we've noted before, these extremes are not a reason to sell all your gold and silver. But if you've already followed our advice to put a reasonable percentage of your portfolio in precious metals, we would recommend waiting for a pullback before making new purchases today.

This advice applies doubly to gold and silver stocks.

As we've explained, these stocks provide leverage to the underlying price of the metals. When gold and silver rise, these stocks can soar multiple times more.

But this leverage works both ways... which means when gold and silver fall, gold and silver stocks can fall much further. Even the best gold and silver stocks could easily fall 15% to 20% during a normal precious metals correction.

If this type of drawdown would keep you up at night, it's a sign that you likely have too much of your portfolio dedicated to these stocks today. Consider taking some profits to reduce your risk. When the correction comes, you'll be in a great position to take advantage.

One last note...

If you're looking for the best gold and silver stocks to buy during the next correction, you won't find a better resource than John Doody.

As you've surely heard by now, John recently joined the Stansberry Research team... and to celebrate, he's been offering a huge discount off the usual cost of his research.

But this offer closes tonight at midnight Eastern time. That means, if you're interested, you're almost out of time. Click here to get started now.

New 52-week highs (as of 9/3/19): First Majestic Silver (AG), Alexco Resource (AXU), Sprott Physical Gold and Silver Trust (CEF), DB Gold Double Long ETN (DGP), Digital Realty Trust (DLR), Franco-Nevada (FNV), SPDR Gold Shares (GLD), Invesco Value Municipal Income Trust (IIM), Coca-Cola (KO), PepsiCo (PEP), Polymetal (LSE: POLY), Aberdeen Standard Physical Platinum Shares Fund (PPLT), Royal Gold (RGLD), Seabridge Gold (SA), Sabina Gold & Silver (SGSVF), Belo Sun Mining (VNNHF), Vanguard Real Estate Index Fund (VNQ), Wheaton Precious Metals (WPM), and Aqua America (WTR).

A quiet day in the mailbag. What's on your mind? Let us know at feedback@stansberryresearch.com.

Regards,

Justin Brill
Baltimore, Maryland
September 4, 2019