Should Gold Bulls Worry about A Market Crash?
The comments below are an edited and abridged synopsis of an article by Jordan Roy-Byrne
There is the potential for a sharp correction in the equity market (15% to 20%), and this will affect precious metals.
Gold and silver had a record-breaking run last spring and summer, and a sustained correction was to be expected. Investment capital and hot money have flowed into just about everything else.
The S&P 500 is up nearly 20%. The CRB index is up 25%. Bitcoin has gone parabolic. Gold and bonds have performed the worst, and that is during a slight decline in the US dollar.
Let’s assume there is a 20% decline in the stock market, and capital flows back into bonds and the dollar. How can that be negative for gold when it has declined during a period of hot money inflows into everything else? It is more likely to be a major catalyst.
For gold to move towards $3,000, it will need to outperform the stock market. Gold has been trading in a large bottoming pattern since 2014. The next correction, or bear market in stocks, is likely to set up a vertical move in precious metals.
So: The preconditions for a crash or major bear market in stocks are not in place yet, but the outlook for stocks over the next decade is terrible. If the next bear market is inflationary, precious metals will diverge and perform well.
Gold does not share the risk of a sharp correction, because it has diverged since last August 2020. Investment capital and hot money have left the sector.
A correction in stocks may be needed to put precious metals in position for the next breakout. Gold could sell off a bit, but would reverse well before the end of the correction.
If you are worried about a crash driving down precious metals but you want to stay invested, here is what Roy-Byrne would do: Avoid optionality plays and avoid silver stocks; these would get hit the worst. Instead, focus on high-quality juniors. This does not mean the largest or the safest; it means companies with the best combination of fundamental quality and upside potential. These stocks would be the first to rocket back after a correction.