— by Mitchell Clark, B. Comm.
The stage is being set for the next big move in commodity prices and gold is going to lead the way. I think that gold is getting ready to make another run above $1,000 an ounce, as the spot price has already sneaked up to $950.00.
Of course, gold stocks are going up because of the strength in the underlying commodity. But, from what I’m observing, they’re doing so with unusually heavy trading volume. This leads me to believe that institutional investors are climbing on board the gold rush train. Also, the stock market’s strength since the March low has a lot of professional investors expecting a major pullback in share prices and big investors are looking to protect their recent gains. Institutional investors are now taking some profits from their winning positions and they’re buying some gold stocks with the proceeds. In my mind, it’s a great trade, because of the downside protection inherent with gold investments.
It is unclear to me whether the possible downgrade of Britain’s sovereign debt is strong enough news to be the catalyst for a sustained retrenchment in stock prices, but, make no mistake; the stock market is definitely looking for the right catalyst to sell.
It really is a peculiar time for equities in that no one on Wall Street really has a defined sense as to where the market is going to go over the near or long term. There is just too much unknown in the Main Street economy for anyone on Wall Street to make a convincing prediction of where stock prices will be in a year’s time. This is due to the uncertainty surrounding earnings, but also the fear that all the government’s monetary and fiscal stimulus just might not do enough to get things going again like they were.
There’s a lot of news to unfold that could have significant effects on the capital markets over the coming months. The question of whether GM will have to go into bankruptcy to reorganize itself is an important one and it will weigh on the marketplace. From the stock market’s perspective, rising unemployment is no longer news. That’s a certainty for the market, so investors are looking beyond this reality. They’re also looking beyond retail sales, housing starts and lackluster corporate earnings. Humble expectations for the Main Street economy are already priced in.
So, what is the stock market looking for going forward? I’m starting to consider debt as the new market catalyst this year and next. And I’m not talking about money owing on credit cards, mortgage debt, or even corporate debt. I’m talking about sovereign country debt and budgetary deficits. All the so-called stimulus spending that’s taking place in virtually all Western nations is with borrowed money. I’m not worried, but I’m concerned that if the United Kingdom’s sovereign debt is downgraded from AAA status, then this will send shockwaves throughout capital markets. There is a snowball scenario that I don’t want to envision and that leads to only one thing — much higher interest rates. It’s something to keep a sharp eye on.
In terms of short-term policy over the last eight months, the financial system was basically saved from a total breakdown. But the core issues have yet to be addressed. Debt and the securitization of debt is increasingly becoming the issue of our time and the issue isn’t going to go away anytime soon. I know it’s esoteric, but keep the sovereign debt ratings news on your radar screen. It has the potential to make the whole system unravel again.