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Abu Dhabi, UAETuesday 19 February 2019

A stock crash would send gold on a wild ride

If US stocks crash in 2016, the gold price would hit a new low and a new high – so says investment expert Peter Cooper.

Gold does not figure in many articles about where to invest next year.

That is not so surprising after four years of declining prices. Even the Saxo Bank list of “outrageous predictions for 2016” passes on the metal, though it says silver might shock us with a 33 per cent price gain – though that could only come if gold prices also jumped much higher.

The diehard gold fanatics are quieter too. Marc Faber still gives gold and gold companies as his contrarian call of the year, but says nothing more. The contrarian’s contrarian, Doug Casey, tucks a plea to buy gold and silver away behind a more astonishing conversion to the merits of big-capitalisation US multinationals – and this from a man who also thinks a Wall Street Crash is imminent.

If you have to look for a theme for New Year’s predictions, then this is it: now that we have had the first Federal Reserve interest rate rise in almost a decade, the second-longest bull market in US stock market history must be about to keel over. Nobody wants to be too specific on exactly when or how or what the catalyst might be, but you can tell which way the wind is blowing.

A weakening US economic recovery, falling profit and revenue, the impact of the high dollar on multinational earnings, valuations not seen since the days of the dot-com bubble – they all point to a lower and not a higher stock market, and that usually happens in the form of a fairly violent correction or crash.

What will this mean for the price of gold? Most gold analysts go back to the global financial crisis and look at what happened the last time Wall Street fell out of bed.

In the initial stages of the crash of late 2008 gold was also sold-off. Investors with margin calls from their brokers dumped bullion to meet these payments and the price came down. But this time around gold has already been through a four-year correction and is not coming off a seven-year bull market top, so it could be different this time in the sense that it already is different.

However, given that a stock market going down is a bit like the Titanic sinking in that it drags everything around it into its downdraft, it could be that gold drops in price to a new low. How low could it go?

The Elliott Wave theorists are happy to posit US$960 as a 50 per cent retracement from the $1,920 all-time high of October 2011. That’s the price at which the Hot Commodities author Jim Rogers, one of the first to call the commodities bull market of the 2000s, will buy more gold. Less-exacting chartists think gold won’t go below $1,000 because the Central Bank of India will buy at that price.

In any case, it is perfectly possible to see how gold could hit a new low next year. The next question is whether it could still hit a new high.

Again, past precedent is handy here. The precious metals gold and silver showed the strongest recovery of any asset class in the Global Financial Crisis and zoomed up to treble and surge eight-fold, respectively, by their highs of 2011.

To get gold back above $1,923 next year might still appear unlikely. But when you think about what the reaction of the global central banks would be to a Wall Street crash in terms of money printing, then a flight to gold is not such an impossible thing to imagine. Quantitative easing drove gold to the highs of 2011 from the big sell-off of 2008-2009 in a classic flight to safety.

Consider too that the resumption of the gold bull market now from its four-year correction would bring the metal to the classic final phase of a long commodity bull run, and that is the parabolic stage. This last happened in the late 1970s and the price spike of 1980. Gold rose eight-fold in price from its correction in the mid-70s.

If you are down on the gold price for next year, then remember you are probably also expecting a continued strengthening of the US dollar and two or three more Fed rate rises in the year. Just how likely is that to happen without driving the US economy into a recession and Wall Street into a slump? The contrarians are usually right in a down year.

Peter Cooper has been a senior business journalist in the Arabian Gulf for the past 20 years.

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Updated: January 1, 2016 04:00 AM

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