A Closer Look at Gold, Silver, and Bitcoin
Let’s review what these markets have been doing where they are going
This past week has been a very interesting week in the markets. For more than a month I have been advising my readers to take some profits on their long gold and silver position. I have also been forecasting a move to $90,000 in Bitcoin since July, where I recommended we should take profits on our long Bitcoin. Let’s review what these markets have been doing where they are going, and have a look at some other markets as well.
First of all, please have a look at the following charts of gold and silver. Gold has sold off hard, having aggressively rejected the all-time highs above $2750 per ounce. I wrote that I was expecting the bottom of this corrective cycle to be roughly $2435, and that is still a reasonable possibility. Although this market has technically corrected enough price-wise, I would wait a bit before reestablishing a full position here. I still like gold a lot, and I expect it to eventually trade much higher, but it may take a while longer to fully work off the extreme overbought technical condition of the market. Yes, the next big economic cycle is likely to be one with lots of inflation, and that should result in stronger gold and silver markets, but that doesn’t mean prices should just keep climbing in a straight line without periodically correcting.
As you will see in the silver charts below, this market has likewise begun a corrective cycle. After nearly touching $35.00 per ounce, silver has traded sharply lower, dipping down to $29.66 before bouncing a bit. This last uptrend began at $26.44, and the recent corrective sell-off was possibly enough price-wise to correct the dramatically overbought condition, but it is reasonable to expect some further consolidation before this market resumes its longer-term bull run.
Bitcoin is in a slightly different position than gold and silver. After consolidating and basing for many months, it finally exploded higher this past week, rallying nearly 40% from the lows on November 3rd to the high this week of $93,318. In case you want to play for one more sharp, but short-lived rally, you can buy a small amount of Bitcoin around the $88,000 before it has one more surge higher towards the $100,000 level. You need to have a very tight stop on this position as this rally will likely end with a violent correction. There is still a chance that we reach my final target of $99,940, but the market is getting dangerously overbought. Considering that I have recommended a long position in Bitcoin since $55,000, I thought that it would be best to exit after the bulk of the rally. That is why I have suggested for a long time that we take profits at $90,000. Going forward, I want to reassess the market once we go through a major corrective cycle after this huge rally.
By the way, it often happens that markets try to reach round-level targets, but stop just shy of them. For example, when the pound was crashing in 1985, and then again in 2022, the market players were all excited about the pound breaching par against the dollar, but in each instance it stopped just short of $1.00 per pound. Another example occurred with the SPX exploding higher above 4800 in January of 2022. Market players were all excited about breaching 5000 for the first time, but the market sold off all the way to 3491 before finally basing and eventually taking out the 5000 level more than two years later. With Bitcoin, I wouldn’t be surprised if it fails to breach $100,000 on this run before starting a significant corrective cycle. Longer term, I have no problem with the idea of a much, much higher Bitcoin, but I am not expecting it in this part of the cycle. There are many such examples.
There is extreme bullishness in Bitcoin right now, and I expect massive profit-taking in front of the $100,000 price level. Unfortunately, I expect the Fear of Missing Out to induce many latecomers to the party to try to jump on board the train just as it is getting ready to leave the station in the opposite direction. We are likely to see continued hyper-volatility in crypto-related equities such as Coinbase, with periodic insane rallies and equally insane sell-offs. I have rarely had the pleasure of trading options with a volatility level in excess of 100%, so I have particularly enjoyed my trading in this wild stock. Bitcoin trades at an extremely high volatility level, but Coinbase can easily move two or three times as much on a percentage basis as Bitcoin. Trading options in Coinbase is definitely not for the faint of heart. My potential upside target in Coinbase is roughly $395, but I don’t expect it stay around that level for long if we actually reach it. There are many interesting ways to play for that move, or similar explosive moves using limited-risk option strategies. If you are interested in learning more about these sorts of strategies, feel free to contact me.
For your amusement, I have included a chart of Coinbase below. The magnitude of these moves is shocking.
For those of you who have somehow missed the announcements of President-elect Trump’s coming economic policy, we need to gird ourselves for some extreme volatility for quite some time. First of all, the current volatility level in the US is much higher than the bankers at the Federal Reserve want us to believe. The core inflation numbers are still well above 3% on an annualized basis, and that doesn’t jive well with the Fed trying to find excuses to continue to lower rates. In fact, if I were Jerome Powell, I would take this opportunity to gracefully resign and leave with his head held high. The US economy is outperforming nearly all of its major trading counterparties, stocks are at an all-time high, unemployment is low, and inflation, while still too high, is certainly a lot better than it was in 2021. Things are unlikely to get a lot better any time soon.
Going forward, the Fed will have the unenviable task of trying to manage some highly inflationary policies that will likely fly through Congress due to the Republican sweep of both houses in the recent elections. Lower taxes, broad-based tariffs, ballooning deficits, a central bank that almost always errs on the side of being too loose, credit market conditions that are very tight, and a stock market that is about the most overvalued in history make for an absolutely explosive combination. How will this play out? It will be very messy.
Before I shift to some macro forecasts, I need to reiterate that the Fed absolutely should not have cut rates by 50 basis points several month ago, and they had no good reason to reinforce that bad decision with a follow-up 25 basis-point rate cut. Inflation is nowhere close to the Fed’s long-term target and unemployment is still very low. The Fed claims to be data dependent, but they have not been acting that way. The Fed talks about its dual mandate to seek stable prices and maximum employment, but their agenda seems to be more driven by artificially boosting the value of the stock market. A strong stock market fuels a massive Wall Street industry, and it gives politicians positive talking points when they speak with their constituents, but the stock market is not the economy. I already touched on this issue last week when I addressed the disconnect between the all-time high levels of the stock market and the brutally tough economic reality of tens of millions of Americans.
In terms of the stock market, I am expecting perhaps one more marginal new high before we start a good-sized correction. I am not expecting this coming sell-off to be the major downturn that I am expecting over the coming years. I think the sell-off will be on the order of perhaps 12% to 15% -- ugly enough to wash out the latecomers to the rally, but not catastrophic. The Nasdaq’s sell-off will likely be a bit larger in percentage terms, but not dramatically so. There just might be enough latent buying power to fuel one more strong rally -- possibly to new all-time highs -- after this coming correction, but when that rally is done, you really need to be very, very careful about what is coming next. The magnitude of the sell-off that I am eventually expecting will be of historic proportions.
Currently, there is way too much bullishness in the market, and the fear of missing out is driving people to make very foolish investment decisions. If you have core long positions in the market, you would be well served to shift to a more defensive position so that you have the flexibility to buy into the coming correction. Corrections always come, whether we like them or not. It is the nature of all markets.
Shifting to currencies, I want to note that the yen crosses are still largely chopping around. Yes, the market is very, very bullish on the US dollar, but that trade is getting way too crowded. What is unusual in the current market is that the aggressive yen selling has not resulted in a major weakening of the yen on the crosses. When the yen starts its next major recovery – and that time is not far off – the yen will likely rip higher on the crosses. I persist in my view that cad/jpy, nzd/jpy, and aud/jpy will have very sharp declines, but the yen will likely strengthen significantly against nearly all major currencies. In case you have a heavy long exposure to equities, betting on the yen’s strengthening on the crosses is nearly always a wonderful hedge against sharp declines in the stock market. The yen is still one of the best safe haven assets, and the coming correction in stocks will almost certainly be matched by a sharp rise in the relative value of the yen. The yen will likely appreciate in any event, but a correcting stock market will simply add fuel to the fire.
Next week I will address the currencies in more detail as there are many interesting opportunities developing there. In the meanwhile, I wish you all the very best of luck with your trading.