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What Gold Tells Us About Today's Reversal
by Brandon Chapman, CMT |
The S&P 500 staged a 2% rally off the lows heading into the last hour of trading today.
That's not a tepid move, and it comes following a fairly risk-off day last Friday. The VIX responded by coming close to touching 25 before reversing intraday. The question on a lot of traders' minds has to be: "Is this the beginning of a much bigger move in the market?" |
Let's start this analysis off by discussing the recent performance of gold. |
At the time of this writing, the SPDR Gold Trust (GLD) was up 1.4%. The only S&P 500 sector that was outperforming GLD was the Consumer Staples Select Sector SPDR Fund (XLP). The Real Estate Select Sector SPDR Fund (XLR) was trading just behind GLD with a 1.21% advance. |
If you were optimistic about the market in the near-term, today's performance fell short of real bullish expectations. |
You may point to the intraday reversal, but that is a tenuous argument, at best. |
What to Know About the Expected Move |
The recent 5% downdraft in the S&P 500 has helped balance out the near-term risks as it tests its March 13, 2025 low. If you were to consider the next 5% move, there might be an equal probability of reaching that level to the upside and to the downside. That isn't supported by the SKEW in the SPX options, but empirically and visually, it seems like a reasonable assumption. |
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With that in mind, you might be looking at both bullish and bearish opportunities at this point. |
The Golden Signal |
While many traders may be encouraged by today, the significant outperformance of gold against the S&P 500 is a major signal that all is not well. Gold is a negative-yielding asset adjusted for inflation. People hold it because it maintains purchasing power, not because of a return long-term. |
What's different today is that gold's utility may be in the process of being "revalued." It appears that the U.S. is repatriating gold, as the London bullion banks (LBMA) are scrambling to come up with physical gold to deliver. The current predicament they find themselves in is their gold futures contracts have been delisted at the COMEX: |
"Effective immediately, Commodity Exchange, Inc. ("COMEX" or "Exchange") delisted the Gold Kilo Futures, London Spot Gold Futures, London Silver Spot Futures, and Cleared OTC London Gold Forwards (collateral margin) contracts as more specifically set forth in the table below (the "Contracts"). There is no open interest in the Contracts." |
What's becoming abundantly clear is that the demand for physical gold is outpacing the ability to provide the needed supply. This a direct threat to any and all products that benefit from monetary inflation. The financialization of everything and the lack of real collateral is a sign that not all is well with the market. |
Over-Financialization Becoming a Limitation |
How do companies that have little to no revenue and don't generate any cash flows survive? They are in effect leeches on the financial system; access to debt and equity markets keep them afloat as management figures out how to run their business. |
The issue isn't that these companies exist, but that they're given rich valuations despite any ability to show profitability - and insiders diluting shareholders through exorbitant stock-based compensation. |
In an efficient market, these companies wouldn't be able to achieve expensive valuations needed to keep accessing new capital infusions through the market. |
They would need to operate as a going concern to keep it going. |
With gold outperforming the market so significantly, it shows that the value of the market is eroding as money moves to the sidelines and into assets that provide a store of value. Looking at the nominal performance of the S&P 500, you see a mirage of gains that vanish as they are put under gold's microscope. Once inflation is accounted for, there are no real returns for the S&P 500, and haven't been for many decades. |
Gold's Role in Investor Intuition |
It suspends belief for those not caught amongst the FOMO crowd to see the amazing annual returns for the stock market. Once you start to compare the nominal returns for equities against gold, you see that all the nominal positive returns vanish. The strong performance of gold is a perfect illustration of the mirage of wealth created by looking at the nominal returns of an index. |
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Looking at the S&P 500 from this perspective helps validate many investors' intuition about market returns. It validates the understanding that printing money and amassing substantial debt isn't a pathway to success. In the end, assuming the markets are efficient and constructing a diversified portfolio through purchasing an index like the S&P 500 has proven a failure over the past 30 years. |
Catch the Shift |
The inability of the LBMA market to deliver gold is an emblem of the failure of debt-based economic principles emphasizing consumption more than production. This failure has led to decades of erosion in the purchasing power of S&P 500 shares. The discipline of gold casts light in the darkness of financialization of everything and the generational grift that goes on. |
Gold's recent surge past $3000 reflects the rejection of the past misallocation of capital. However, gold's return is only a matter of U.S. dollar devaluation. While gold may continue outperforming the S&P 500, it doesn't guarantee a positive return if the mountain of credit resting on the nail head of a pin begins to collapse. |
For today, remember that the market may be oversold and may rally, but the bigger picture of one that may be emphasizing real and productive assets, not financialization. This trend may ultimately cause the market to fall more precipitously as the dollar financialization begins to fail and credit is wiped off the books. This will likely yield significant strength in the dollar amidst a correction in gold and a much bigger sell-off in risk assets. |
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