As the world rolls out vaccines to stop the pandemic by achieving herd immunity, it is clear that there is no ‘jab’ available to stop the herd mentality taking markets into dangerous areas.  Herd mentality, fuelled by cheap money and a mix of overconfidence and overspeculation, produced the dot.com bubble.  Today, hedge funds net-long positions in commodities are at a ten-year high, the S&P 500 put-to-call ratio continues to head south towards record lows, and Equity Indices are relentless printing fresh all-time highs.  So, is history about to repeat itself, and is this being flagged by gold approaching a death cross?

Without looking at the specifics of every commodity, it is clear that prices are being driven higher by a perfect mix of a reflation trade (expectations of an improving economic cycle), exceptional stimulus from both the fiscal and monetary side, and a demand/ supply side that is looking favourable (supply bottlenecks meeting increased demand).

The conditions for investors may be positive but the direction and the strength of buying is again being driven up by the FOMO effect.  The term FOMO may not have been used at the time of dot.com but it sums up what happened and 20 years later we are seeing the same ‘must have’ buying of commodities.  This could be part of next supercycle but the last thing markets need at the moment is bursting bubble…

 

No Jab to Stop Herd Mentality | SquaredFinancial

 

  • Weak dollar is keeping gold supported above $1815
  • WTI Crude is at 13-month highs, above $60pbl, fuelling expectations of a quicker than expected build-up in inflation
  • Silver up by more than 4.5% YTD 2021 vs. negative returns for Gold of ~4% YTD
  • Platinum, copper, lumber, iron ore all higher

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The positives are clear but there are some major concerns for investors.  The one we are watching is the impending ‘death cross’, pattern for gold.  If we look at the daily chart the metal’s downtrend, set in motion back in August, is still in play forming lower highs and lower lows, with the added bearish indicator of the 50-SMA inching closer and preparing to cross the 200-SMA.  This will lead to the formation of an infamous ‘death cross’, a chart pattern which indicates the potential of a major sell off.

No Jab to Stop Herd Mentality | SquaredFinancial

 

Gold lagging its commodity peers could be explained by higher treasury yields keeping the safe haven under pressure, hyped risk on sentiment and position liquidation, as investors relocate to higher return/ FOMO trades.  The absence of inflation, or perhaps Bitcoin’s move on the yellow metal’s turf as an inflation hedge, could also be playing their part but either way the potential death cross pattern does not look good.

In the shorter time frame $1815 is still providing strong support with $1800 as the next line of defence. However, if gold does fall through these levels it could easily go back to $1780 and $1750 as the next stops.  The question is whether there is enough growth, post pandemic, coming through in global markets to support the herd mentality and maintain all commodities if gold crashes.

The problem with the herd mentality is that FOMO, which is normally associated with buying, also applies to selling, and unlike herd immunity we do not have an injection to stop it spreading.

 

Karim Maalouf, FRM

Senior Market Analyst at SquaredFinancial

Karim started his career at a top bank in Credit Risk portfolio managementmoving onto Financial and Liquidity Risk, consulting, investment banking, building knowledge and trading experience along the way only to develop a passion for the fascinating world of trading and diverse trading strategies (high frequencyalgorithmic and day trading) benefiting from mentorship of leading industry experts. Karim believes that deep education is essential before risking any money. He joined Squared Research in 2018 as an Equity Analyst, but continues to trade on a discretionary basis, using successfully developed methodologies coupled with effective risk management and a winning psychology. Karim obtained a Bachelors’ Degree in Economics from the American University of Beirut (AUB) in 2011, is FRM© certified with the Global Association of Risk Professionals (GARP) since 2017, have successfully passed CFA (Chartered Financial Analyst) level I, and CMT (Chartered Market Technician) level II.

 

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