Real rates are not falling, AI-based profits are in danger, and world stocks failed to break higher. This is not to be ignored.
In yesterday’s Gold Trading Alert, I focused on gold’s analogies to the previous rally and to 2011. Today, I’ll focus more on stocks.
After all, what’s going to happen in the stock market – not just the U.S. stock market, but also globally – will have a huge impact on all the other markets. Remember the slide of 2020? Or the one in 2008 (ok, the real estate market was first here, but most markets didn’t really react until stocks did)? With significant declines, there comes a significant impact that no market will likely be able to ignore. Maybe some tiny companies that are mostly driven by their own fundamentals that are not that affected by what’s going on “in the big world”, but those are just exceptions from the rule.
The U.S. stock market is probably topping here. I’ll write more below, but while your attention is on the above chart, please note how the S&P 500 Index futures failed to move to new highs this year. Despite the recent rally, it remains below the 2024 high.
While the rising support line was not broken, when it finally gets broken (and the breakdown is verified), we could see a really powerful decline. The points that I’ll make below as well as the situation in world stocks provide much more context to the above.
The 10-year real interest rates are not moving lower despite the rate cuts from the Fed. We simply saw a consolidation and that’s it.
Some might say that the real interest rates “should” be falling given declining rates, and since it’s not happening, it seems that the real rates really “want to” move higher. Once the market adjusts its expectations more, the 10-year real interest rates could soar higher – perhaps as just as they soared since 2020 as the moves that precede consolidations tend to be similar to the ones that follow it.
This would be bearish for stocks as well as for the precious metals sector. After all, gold doesn’t provide interest payments (unless you lease it), and companies have interest on their debt to pay. With very low real rates, the credit was almost free, but this is no longer the case. And it might get more and more expensive in the future.
This is powerful bearish factor from the fundamental side that is likely to trigger a bigger decline once the reality kicks in.
Another thing is that the DeepSeek AI that made many AI uses free is a serious blow to the AI-led rally. Yes, the technological advancements are great, but if the U.S. tech companies are not able to capitalize on it anymore (or the earnings will decline substantially), then the future earnings are in danger, and since markets are forward looking, this is likely to impact the stock prices shortly.
This might give a boost to the non-U.S. companies, though, as it makes the high tech more accessible. Still, since world stocks have serious trouble breaking above their previous, long-term highs, I doubt that the above will be enough to push them.
The opposite might take place. You see, technological advancements are double-edged sword. On one hand, we can produce stuff cheaper, but on the other hand some things and some ways of providing work become obsolete. This means layoffs and, in some cases, bankruptcies.
For example, commodities like copper and silver soared based on the premise that with more and more technology usage, those two metals (silver is the best electric conductor and copper is second-best) will soar as the demand for them will boom. In reality, it turned out that due to advancements in technology, less and less of those commodities needs to be used per product. Energy usage has become a major issue (we all want our laptops to work longer on their batteries, right?) and making chips smaller and more effective in power usage became critical. This is connected with miniaturization and actually a decrease in the demand for raw materials. Sure, there might be more demand for new gadgets, but… It doesn’t have to be the case.
The AI revolution is about how we use what we already have and about making the software more efficient. Making computers more powerful is also important, but due to the above-mentioned mechanism, it doesn’t have to translate into higher commodity demand.
Plus, it’s not that necessary to upgrade to new gadgets anymore as this doesn’t add a lot of value. E.g. my iPhone 12 mini takes pictures that are “good enough” for me and the software on it does everything that I need it for (and more). I’m not motivated at all to upgrade to a newer moder anytime soon - unless they create a smaller phone – then I might consider it. That seems unlikely to happen in the near future as it seems that their business model is now to create mostly big phones as it stimulates demand for something that’s actually handy – smartwatches.
So, it seems that the “big purchases” of new tech are already behind us and the technology now advances in a way that doesn’t increase the demand for commodities in a way that many were expecting it to in the past. This disillusion is likely one of the reasons for silver and copper to perform relatively poorly in the previous years (compared to gold and stocks).
On a side note, please note that fitness trackers are kind of like the Tamagotchi toys that were popular years ago. The difference being that the tiny animal that you’re taking care of and trying to keep alive is yourself ;). Don’t get me wrong, I’m not bashing the concept of fitness trackers completely – I used them myself – I’m just pointing out the analogy that I read somewhere and that I found funny.
Moving back to the analysis, here’s how the situation looks like in world stocks.
World stocks topped in 2007. This happened while the USD Index formed a major bottom. What followed was a significant decline not just in world stocks, but also in the values of gold and silver mining stocks (the XAU Index in the middle of the chart).
Stocks tried to move above those high in 2021 (while the USD Index was forming a major bottom) – and they failed. And what happened next? Stocks declined heavily and so did gold and silver mining stocks.
We see the same thing now and, in a way, we already saw it. I mean that the top in world stocks is most likely in, but since it’s taking a broad form (just like in both previous cases), it’s not that clear. What is clear, however, is that we already saw a major bottom in the USD Index and that it’s on the rise.
What’s likely to happen next? We’re likely to see a major slide not just in world stocks, but also in gold and silver mining stocks.
Please note that in both previous cases, we saw one final show of strength in the mining stocks before the plunge. That was a fake rally – a bull trap. It seems that this is exactly what we’ve been seeing this year.
Yesterday, I commented on gold and GDXJ, so today I’ll focus on other charts (in fact, by discussing stocks, I already did that). Let’s take a look at the values of the GDX ETF.
The RSI indicator based on the GDX ETF didn’t just touch the 70 level – it broke above it, and this is not something that’s happening frequently.
I marked all recent cases with red arrows, and it turns out that in four out of five cases when we saw the same thing – that was the local top. In the remaining case, it was not the final top, but the final top was just $1.28 away from the top that accompanied the extreme RSI reading.
The implications are clear – we’re either seeing a top right now (more likely) or it’s going to form with the upside being very limited. Based on this analogy, it seems that the 2024 high is the maximum target for this rally. Of course, this doesn’t make it likely – just as in four out of five cases we saw tops when RSI was as high, it’s more likely than not that the top is in or within “cents”.
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The above is how I started today’s Gold Trading Alert, and its full version is available to subscribers. The thing that I’d like to add here is that today’s reversal in gold, silver, and miners (and declines in the last two) are in perfect tune with what I wrote there. The same goes for the important indications coming from copper and FCX.
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Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief