Gold hit a four-month high yesterday…

The price of gold jumped 1.2% yesterday. It closed at $1,143, its highest level since October.

Gold is now up 7.8% in 2016. On Tuesday, Bloomberg Business said gold is the top performing commodity this year… 

Gold is the ultimate wealth insurance. Unlike stocks, bonds, and paper currencies, gold holds its value long term, no matter what happens in the economy. That’s why investors often buy gold when they’re nervous about stocks or bonds.

•  The S&P 500 has dropped 6.4% this year…

It’s the worst start to a new year for stocks since 2009… when the U.S. economy was in its worst downturn since the Great Depression.

However, the bull market in U.S. stocks is still “technically” alive. According to the mainstream definition, it takes a 20% decline to kill a bull market. The S&P 500 is “only” down 10.2% from its high.  

U.S. stocks appear OK on the surface. The S&P 500 is still up 183% since the bull market began. Since 1932, U.S. stocks have climbed an average of 136% during bull markets.

But the seven-year rally in U.S. stocks is losing momentum. The S&P 500 has fallen 7.1% since 2014.

And the current bull market is almost 84 months old. The average U.S. bull market since World War II is only 52 months.

•  Bull markets don’t end just because of old age…

But as Dispatch readers know, there are many reasons to invest with caution today…

➢  None of the major U.S. stock benchmarks have set new highs since July.

➢  The Russell 2000, which tracks 2,000 small U.S. stocks, has been in a bear market for nearly a month. It’s plunged 22% since June.

➢  Risky biotech tech stocks have tanked this year. The iShares Nasdaq Biotechnology ETF (IBB), which tracks 190 biotech companies, has plunged 22% since the start of the year.

Meanwhile, investors have moved to safer, more stable stocks. Utility stocks have rallied 7.7% this year, making them the top performing sector in the S&P 500.

➢  Earnings for companies in the S&P 500 likely fell again last quarter. If so, it would be the third straight decline in quarterly earnings. That hasn’t happened since 2009.

•  So far, it’s been a bad earnings season…  

Earnings season is when publicly traded companies release their financial results. A strong earnings season can push stocks higher. A bad earnings season can cause stocks to plunge.

More than 40% of the companies in the S&P 500 have already reported fourth-quarter results. Based on the results so far, Wall Street expects companies in the S&P 500 to show a 5.8% drop in earnings once all the numbers are in.

Analysts also expect sales to decline 3.5%. It would be the fourth consecutive quarter of declining sales, which hasn’t happened since the 2008-2009 financial crisis.

•  The U.S. is heading toward its first recession since 2009…

An economy enters a recession when it shrinks two quarters in a row.

The U.S. economy hasn’t had a recession since the financial crisis in 2009. However, the economy has grown just 2.2% per year since 2009, which makes this the weakest “recovery” since World War II. 

Reuters reported yesterday:

So far this year, the number of companies whose executives have mentioned recession concerns to analysts and investors is up 33 percent from the same period a year ago; the first such increase since 2009. Some 92 companies have discussed a U.S. recession in their earnings calls.

•  Major U.S. companies have been warning about a recession for months…

Last year, machinery maker Caterpillar (CAT), industrial conglomerate 3M Co. (MMM), and diesel engine maker Cummins (CMI) all said they expect sales to decline in 2016.

In October, the CEO of industrial parts distributor Fastenal (FAST) said the industrial sector is in big trouble:

The industrial environment’s in a recession. I don’t care what anybody says, because nobody knows the market better than we do.

•  A slowing economy is bad for stocks…

But it’s good for gold. As we mentioned, investors typically buy gold when they’re nervous about the economy and the stock market.

Unlike stocks, gold has been in a downtrend for five years. Gold is 40% cheaper today than it was in 2011. However, the recent price action in gold is very positive. Looking at a chart, gold has “carved out a bottom” and looks to be heading higher:

We explained “carved-out bottoms” last week. In short, a price carves out a bottom when it stops falling, forms a bottom for a period of time, and starts climbing higher. A carved-out bottom is a key signal that a price is getting ready to march higher.

If you don’t own physical gold… or if you’ve been waiting to buy more… now is a good time to buy. We recommend that everyone own a significant amount of physical gold. Gold is wealth insurance because its price typically rises when stock prices fall. Even a small amount of gold can help you avoid big losses during a major stock market sell-off.

We also recommend owning a significant amount of cash. Like gold, a cash stockpile can help you avoid huge losses. It will also allow you to buy stocks when they get cheap. We think U.S. stocks will get much cheaper than they are today. We’ll let you know when it’s time to buy.

If you’re looking for other ways to protect your wealth in dangerous markets, we encourage you to watch this short presentation. In it, we explain “battle-tested” ways to protect your money in a financial collapse. Click here to watch this free video.

Chart of the Day

The U.S. dollar just had its worst day in seven years…

Today’s chart shows the performance of the U.S. dollar (USD) index over the past year. This index tracks the dollar’s performance against other major currencies like the Japanese yen and the euro.

Yesterday, the USD index plunged 1.7% for its biggest one-day loss since March 2009. March 2009 is when the U.S. government expanded its quantitative easing (QE) program to fight the financial crisis. QE is another term for money printing.

Longtime readers know we keep a close eye on the USD index. The U.S. dollar is the world’s most important currency. Most assets are “priced” in dollars. Even small moves by the dollar can have a big impact on asset prices…

For example, when the dollar gets stronger, it takes fewer dollars to buy an ounce of gold. When the dollar weakens, it takes more dollars to buy an ounce of gold. The same goes for other commodities…

Yesterday, during the dollar’s worst day in seven years, oil surged 10.2%… platinum rose 2.8%… silver rose 2.7%… and copper rose 2.6%. 

With the economy weakening and stocks selling off, we’re confident gold will go higher no matter what the U.S. dollar does. But a weak dollar would give gold an extra boost.

Regards,

Justin Spittler
Delray Beach, Florida
February 04, 2016

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