Concern For Stonks, Pt. 4

A crashing stock market would likely lead to gold & silver liquidations, and as we’ve seen before…

 by Craig Hemke via Sprott Money News

We began this series in April, when former Fed Governor Bill Dudley warned that the Fed was about to “inflict losses” on stock and bond investors. After the latest from Jerry Powell at Jackson Hole, it’s time for another update.

If you missed the first three installments in this series, here are the links from April and June:

It all began with this interview and quote from Bill Dudley in early April:

Fed must ‘inflict more losses’ on stock-market investors to tame inflation, says former central banker

The S&P 500 subsequently fell to 3600 but then staged a summer rally that saw it bounce back above 4000. What happened next? An unhappy Jerry Powell showed up at Jackson Hole and unleashed this:

Monetary Policy and Price Stability

So Powell forecasts “pain” while Dudley wants to “inflict losses”, all to the purpose of crushing demand by driving a reverse wealth effect. At some point, you should take them at their word, and what’s that old adage about fighting the Fed?

To that end, it once again appears that the U.S. stonk market is poised to fall. And why does this matter to precious metal investors? Because as stonks fall, it may lead to a general liquidation of all risk assets. And if all risk assets fall, they’ll likely drag COMEX gold and silver further down with them.

So let’s watch the S&P 500 very closely in the weeks ahead. The charts below lay out the key levels to monitor. In the short term, it appears that 3900 must be held as support. If this level fails, a test of the June lows becomes likely.

And then, if those June lows fail and the 200-week moving average is broken, the trap door opens to a drop as low as 3,000 or even lower. If Jerry wants to see some reverse wealth effect demand destruction, that will certainly do it!

As such, here’s my concern for COMEX gold and silver. A crashing stock market would likely lead to general, margin call-related liquidations, and as we’ve seen before, fundamentals are shoved aside in these periods. Prices fall due to an avalanche of sell orders that simply overwhelm anyone and everyone on the buy side.

And now look at this historical comparison. You should note, of course, that 2022 is nothing like 2013 in terms of geopolitics and economics. It is, however, similar to 2013 in terms of monetary policy. Back then, the Fed was ending QE3 and entering a period of extensive jawboning regarding “shrinking the balance sheet” and “normalizing interest rates”. Does this sound familiar? It should. With this in mind, check the two weekly charts below:

In April of 2013, COMEX gold was in a 19-month consolidation with a floor of support near $1550. The problem was, nearly everyone could see that support and subsequently placed their sell-stop orders just below there. The result? Once $1550 was broken with a $60 drop on Friday, April 12, price then plunged $140 on Monday, April 15.

Compare this to today, where price has similarly been in a 24-month range with a floor of support near $1700. What happens if that floor is demonstrably broken? Let’s hope we don’t find out.

In the end, I wouldn’t expect any plunge in gold to lead to another five-year dead period like we saw from 2014-2018. Back then, the Fed was able to play rhetorical games for an extended period and “the market” believed them. The situation in 2022 is far more dire, and it will lead to a Fed reversal and pivot in a much shorter time frame. Thus any dip in the COMEX price should be seen as a gift to any physical buyer looking to add to their stack.

But the risk of a short-term plunge is real, and it may very well initiate after a drop in the U.S. stonks. So watch the equity markets closely and be prepared for just about anything in the weeks ahead.