2 Reasons Why Gold and Oil Falling Is a Bad Sign for 2023
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In the past two weeks, stocks have struggled to break through resistance and extend the holiday rally. I wrote about it in the last article. Commodity prices starting to fall is a bearish sign. There are a couple of reasons this is a warning signal for traders and investors, and I will show you exactly what they are.
1. Equity and Economic Cycles Signal Market Top and Recession
In the diagram below, you will see two cycles. The blue/green cycle is the stock market. Stocks typically lead the economy as savvy investors can see when businesses, in general, are expanding or contracting, thus telling them when they should buy more shares or start selling.
As you can see, energy and precious metals are the last assets to do well before the stock market tops. Both topped many months ago. Precious metals have had a decent rally in the past couple of months, but that rally should not be trusted.
In this post, I will talk about energy and precious metals. In a future post, I will cover the next two sectors, which have been doing exceptionally well this year and are holding up the best – Health Care and Utilities.
Stock Market and Economic Cycles
- Assets Peak In A Predictable Order
While falling commodity prices signal potential easing in inflation, it’s not necessarily a good sign. That’s because assets peak in a predictable order: bonds, stocks, and commodities.
Without turning this post into a rant, I should mention that what I share here is investing 101. My mission with my trading and investing newsletters since 2001 is to help as many individual investors as possible avoid market corrections and bear markets and profit from volatile times when most others are losing money.
If you have money with an advisor who has just plopped your money into stocks and bonds using the buy-and-hold strategy, please know that 2022 – 2025 could be challenging. I believe that what is about to happen next will delay or destroy your retirement if you don’t have a plan to preserve capital.
While almost everyone suffers from the passive, no-brainer buy-and-hold strategy, which a 10-year-old could do for you, it is not how you should manage your money. You are being tortured but don’t realize it because you think it’s the norm, and that’s because you likely have investment Stockholm syndrome
SPY Weekly Chart
- Crude Oil Prices Continue to Plunge
Crude oil has fallen to the lowest level in over a year, suffering a weekly loss of -10%. Oil has given back all of its annual gains and is taking a toll on energy sector stocks.
As investors see businesses slowing and a recession in the near future, oil prices begin to fall. A recession often means less traveling, slower sales, a decline in shipping, and less product demand. Oil falling means savvy investors see tough times ahead.
Crude Oil Weekly Chart
Gold stocks have been out of favor for a long time despite the recent rally, which has sparked much interest recently. Subscribers and I owned GDX (NYSE:GDX) with our Best Asset Now Strategy and sold it for a quick 7% gain this week. We sold just before the price topped, as the technical analysis charts and indicators told us to get out.
The most important thing to understand about investing is that the only way we make money is when the price of an asset moves in our favor. No news or fundamental data will protect you from falling prices. Moving to cash and reinvesting capital into assets that are rising in value is the best way to secure consistent growth.
Gold Miners ETF Weekly Chart
2. Commodities Have Topped Out
Commodities tend to rally in the late stages of a stock bull market. This is because stock evaluations become high and are no longer a fair value. Thus, investors turn to alternative assets, and physical commodities are the asset of choice.
As you can see in the chart below, commodities topped in June 2022, five months after the stock market topped in January 2022. The DB Commodity Index Tracking Fund (NYSE:DBC) is clearly in a Stage 3 market phase and on the verge of breaking down into a Stage 4 decline (bear market).
Commodity Index ETF – Weekly Chart
Concluding Thoughts
In short, investors no longer want to own stocks, and they don’t want commodities. Going forward, investors will start liquidating positions in all asset classes, possibly for many months, until a new equilibrium level has been found. This is a perilous time to own stocks and commodities if your capital is being invested with the buy-and-hope strategy. Should this be the case, I feel for you because if you are 50+, your retirement will be threatened at the worst time in your life.
