Just when we thought the amount of bearish factors couldn't get any bigger... It got bigger.
The Consumer Sentiment Index (CSI) has plummeted to 52.2, reaching levels not seen since the economic uncertainty of mid-2022. This development significantly strengthens the bearish case for precious metals and related markets.
What Exactly Is the Consumer Sentiment Index?
Think of the Consumer Sentiment Index as the financial mood ring of America. Since 1946, the University of Michigan has been systematically asking everyday Americans how they feel about their personal finances and the overall economy. They compile these responses into a single number that tells us whether consumers are feeling optimistic or pessimistic.
The index works like a weather forecast for the economic climate. When it's high (above 90), skies are clear – consumers feel confident about their finances and are willing to spend. When it drops below 60, it's like a severe storm warning – signaling that consumers are battening down the hatches, cutting spending, and preparing for tough times.
The survey asks questions like:
· "Are you better off financially than you were a year ago?"
· "Do you expect to be better off a year from now?"
· "Is now a good time to buy major household items?"
These seemingly simple questions have proven remarkably powerful at predicting economic turning points. When combined, they create a comprehensive picture of consumer confidence and economic expectations.
Why the Current Reading Is So Alarming
The index is calibrated so that 1966 equals 100. Today's reading of 52.2 means consumer sentiment is barely half as positive as it was in the base year.
(Please click the image below for more details.)
To put this in perspective:
· Normal recession levels typically bottom around 65-70
· The 2008 financial crisis saw readings drop to the high 50s
· Pandemic lows reached the upper 40s
· Today we're at 52.2 – squarely in "economic crisis" territory
This is like your car's check engine light coming on while smoke pours from under the hood – it's a serious warning that shouldn't be ignored.
The significance of dropping below 60 cannot be overstated. It's like crossing a psychological Rubicon where consumer behavior fundamentally changes. People don't just tighten their belts; they completely overhaul their financial lives – postponing major purchases, increasing savings, and becoming highly risk-averse.
The Critical Connection to Precious Metals
What makes this reading especially relevant for gold and silver investors is the historical relationship between extreme sentiment readings and precious metals’ performance. When consumer sentiment crashes below 60, it typically creates a perfect storm for precious metals markets:
Initially, gold might appear resilient as investors seek safety, but ultimately, all precious metals and mining stocks get caught in the undertow as the dollar strengthens dramatically. It's similar to how even strong swimmers can be pulled under by a powerful riptide.
The sequence typically unfolds like this:
- Consumer sentiment collapses
- Investors rush to cash and perceived safety
- The dollar strengthens significantly
- Gold initially wobbles but holds some ground
- Silver, miners, and commodity stocks like FCX experience severe declines
- Eventually, even gold succumbs to selling pressure
We saw this pattern play out with devastating clarity during the 2008 financial crisis. As sentiment plunged below 60, the precious metals sector experienced what can only be described as a market massacre. Gold miners saw catastrophic losses, silver prices collapsed, and companies like FCX had their share prices slashed by more than two-thirds.
Meanwhile, the US Dollar Index strengthened significantly, demonstrating its status as the true safe haven during sentiment crises.
Of course, this is not the only thing pointing to lower stock prices (many other markets would be likely to decline along with stocks), and while we cover many more details in the full version of this analysis (today’s Gold Trading Alert), in this free analysis, I’m going to show you two stock market indices that I haven’t covered recently: NASDAQ and NIKKEI – the Japanese stocks.
I’ll start with the latter because the implication here is quite straightforward.
Namely, sometimes, buy-and-hold is not the answer. The investors that bought the Japanese stocks at their 1990s top had to wait for 34 years just to get back even… But only in nominal terms.
And since now the stocks have likely topped once again (the breakout above the 1990 high was invalidated), it seems that those investors might need to wait many more years before they get even in real terms.
The key take-away is that paying attention to extreme price bubbles is an exceptionally rewarding investment of each investor’s time.
Having said that, let’s take a look at what the tech stocks have been doing recently.
In short, they corrected about half of their previous decline. That’s interesting because this is approximately how much they had also corrected after the initial part of their 2022 decline. What’s even more interesting is that in both cases, the correction happened shortly after the 50-day moving average moved below the 200-day moving average (so-called “death cross”).
Consequently, based on technical grounds, and given the incoming economic tariff-based trouble, the stocks are likely to decline sooner rather than later – and many sectors / commodities are likely to decline along with them. Some will get hurt by it all, and some will profit (greatly). Getting more details might help you get into the second group.
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Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief