Markets, Gold and Reagan Two

In 1980, while I was en utero and the world was preparing for me to be unleashed upon it, a little something happened in these United States.  An actor, who had won governor of California, somehow also became president of the United States.  Perhaps in response to the alleged catastrophe’s that were the Nixon and Carter administrations (although I can’t be sure, my parents hadn’t even met each other yet in the 70’s, yeah, I get it, I’m young).  I get the feeling that people had had enough of the old-guard establishment, Korea and Vietnam wars and the destruction of the intrinsic value of our currency.  So we hired a former actor and gave him the most prominent political position in the world.  Love or hate the guy (and as a conservative leaning person, I have things I both like and dislike about his tenure), it was America’s public saying, “enough is enough.”

Following the creation of OPEC, the US sold off a large portion of our gold holdings at a staggering profit of a few dollars per ounce.  That may sound like nothing at today’s $1,200 price tag, but at the going rate of $35 bucks, $37.50 was a hell of a 10% profit, realized immediately.  Unfortunately, gold then doubled, and then again, and again, and a few more times until it eventually ran itself all the way up to well over $800.  When Reagan took office, gold had already started it’s long march back down to reasonable levels.  Equipped with a no-holds-barred approach at the Fed with then-chairman Paul Volcker and his big stick of austerity, the duo managed to whip the equity markets back into shape… although it took a few years to get going, was brutally painful on the agricultural industry and others dependent on easy credit.

reagan-tenure

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When Reagan first took office, the equity markets took about a 4.2% climb, touching all-time highs, followed by a 23% loss, that strung out over the first year and a half of his tenure. However, by the time he left office 6 years later, the DJIA was 200% higher, averaging 33% a year for the 6 years it grew.

In Fact, it wasn’t until 2000, when Clinton left office, that the stock markets had their first REAL correction.  Many can blame a number of panic events like the Y2K scare that contributed, but I’d argue the repeal of Glass-Steagall was repealed… Thanks Bill.

 

Fast Forward to 2016, and it’s no surprise that I’m the one billionth person to make the comparison between Trump and Reagan.  Since trumps election, stock markets are up 4.8%, also touching, and in this case exceeding all-time highs.  But I still feel there is a great unwinding of leverage built up in the system during both the Bush II and Obama administrations, that no matter who won the election, there are market corrections pending, inherited from predecessors, that cannot be avoided.  I find it unlikely, no matter what our new president-elect does, that the market will shake-out a large number of euphoria buyers that came in on leveraged investment over the last few years.  The best he can hope for is to make things ‘NOT WORSE,’ and in time, will be given the opportunity to see real growth.

But what Trump doesn’t have is a Volcker.  Someone has to take the cookie jar away when the time comes, and I don’t know if Yellen is that person.  I hope I am wrong.  Trump does have the backing of both the House and Senate, first time since I believe 1928 that pubs held all three, but they are still politicians, and many of them lifers.  And Trump is NO republican, so the votes to keep emergency money flowing will likely lean towards the ‘Yea’s.’

So what do we watch?  Where do us traders seek volatility to maximize our returns?  I will be heavily interested in how the US Dollar and British Pound trade against the Euro.  For the last number of years I have been pretty focused on the producing nations in my own trading, like the CAD (Canadian Dollar) and AUD (Australian Dollar).  However, with a Republican dominated Washington, I see a great emphasis on US resource production, pouring even more water into an already flooded commodity market.  I will also be watching Gold closely over the next few months.  While this goes against my above-mentioned belief that commodities may become stagnant for a time, or even trend lower.  My interest in Gold lies more in its primary function of ‘panic’ or ‘reserve hedge’ against inflationary/fiat currencies.  Many traders forget why nations and people still turn to gold, and focus too much on the futures and options.

*I suppose we could say that about a lot of the things us traders deal in, forget the purpose as to why people buy stocks, options, futures or currencies to begin with.  Why those markets existed in the first place.  Really, we’re just whores chasing momentum, but admitting it is the first stage of recovery.

I do not believe gold has made it’s “Carter Era” move as yet, and there are still grand moves to come.  However, gold did do two interesting things today.  See the chart below.

click to view

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First, gold came down and finally touched its 65-Week Moving Average.  About 6 weeks ago or so, I put together a video at my firm (no, I’m not the one speaking, I had guys with better voices than me do that) discussing this as a likely price point that gold should retrace to, and provide an entry point.  If you would like to watch this video, CLICK HERE.

Second, gold failed to breach the low set in May, and if that price holds, I believe we are seeing a three drives pattern building momentum.  Couple that with the assumed market corrections I believe we should see over the first year or two of our new president, I think $1,585 gold is a reasonable next target up.  Pamela and Marry Ann Aden, expert practitioners of Elliot Wave Theory have been calling for this D-Wave correction for months.

However, as a momentum junkie, I have to also look at the alternative and plan accordingly.  Should gold continue down and break $1,200, I’d expect a bounce back up to roughly $1,305, forming a Quasimodo Head and Shoulders pattern, and a fall, perhaps sub $1,100.  All in all, I’m looking at long positions today in gold, with pretty tight stops.  If I stop out, I’ll be looking for a short trade between $1,285 and $1,304.

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