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Some simple and basic 'Fundamental Analysis'

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I wanted to share some simple and basic 'Fundamental Analysis' with regards to my 'Long' Gold and Silver trades and 'Short' S&P 500 trade.

The Gold price is continuing to rise as equities around the world are declining. Gold is priced in USD and US Equities are in 'bear market' territory. US Federal Reserve has raised interest rates by 25 base points. There are a lot of 'risks' at the moment in terms of equities declining, Trump's Trade War with specifically China and monetary policy. These conditions are favourable for Gold going forwards. 

For those who may not be familiar let me explain when a market is in 'bear market' territory. It is when a market has declining by 20% or more from its highs. The biggest worry is any 'recessionary impact' that may come going forwards. A lot of people have obtained cheap credit whilst interest rates have been at all time lows. If interest rates begin to increase then if these people have not managed their risk properly then they could be in trouble as their repayments begin to increase. Business are effected by interest rate increases too so as their loan repayments increase their costs increase which could lead to job cuts.

On top of this major technology stocks have entered into a 'Death Cross' recently. Now for those not familiar with what the 'Death Cross' actually means then it is when a share's 50 day moving average goes below its 200 day moving average. This tends to signal a change in trend from upwards to downwards. I think it could take months or at least the first quarter of 2019 for this bear market to try and bottom if not longer. I have a 'feeling' that this is going to be a enormous downtrend and those who do not short such opportunities are going to miss some exceptional opportunities. These are just my personal thoughts based on my 'gut' and 'instincts'. So please do not take this as 100% likely or it is given. I could just as easily be wrong. 

Now in the past on IG Community traders have posted many threads and posts about 'Buy the Dips'. I would absolutely not buy the dips right now on such indices trending strongly downwards. What I would be looking to do is 'Sell The Rips'. This is the opposite of the buy the dips. During any prices rises during a downtrend one adds to their position and adds to their short position. It is being reported that indications are the more declines are likely to be seen in the weeks and months ahead. It seems the major indexes are producing new lows which gives me the impression that the worst is still to come. What makes it difficult for us traders is that volatility is increasing. This is great for day traders and shorter term traders but for anyone who holds long positions it becomes difficult with the risk of stop losses getting executed. 

The dynamics of the current scenario is fascinating. I never thought I would be 'Long' Gold and yet I am. Risk tolerance is declining and along with it the markets are declining. Now one could infer that the price action of Gold is making it look like a potential safe haven for investors. There is the potential of a weaker dollar which could lead to higher Gold prices. I have openly stated I am not a fan of Gold. However, I saw an opportunity to get in early on what seems to be a trending upwards movement based on price action.

We have the US Government shutdown which seems to be becoming a regular occurrence. For me this creates uncertainty in the market which is going to bad for stock markets and positive for the likes of Gold. When one adds the US Monetary Policy into the mix then one can see why things are unravelling the way they are. 

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Continuing with the fundamental analysis with the US in particular I would like to add that the US dollar has ended 2018 as one of the stronger currencies. It is after all the world's reserve currency. 

Now there is an expectation that the low interest rate period is behind us. One of the biggest issues is the US's national debt which is simply unsustainable on any level. This could rear its ugly head in 2019 and presents a major risk from a fundamental perspective on the markets. 

I shall be keeping a close eye on Bonds and Gilts in 2019 and see the price behaviour of those assets which may well help to give an indication of future price performance on equities. 

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As the country awaits the voting on the Brexit deal it will be rather interesting to see how the FTSE 100 and other UK indices behave as well as the safe haven 'Gold' in tomorrow's session and the overnight session throughout the night. 



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Well the US Government has ended albeit temporarily the shutdown. The markets which were expected to sharply fall have risen phenomenally, especially the US indices. I tried to short the US indices and clearly got the trades wrong. Right now based on price action one should be trading long as one should never go against the trend regardless of fundamentals, economics, news, etc.

Trends can be extremely powerful and if one trades solely based on fundamentals when there is a disconnect with the price action then it can be extremely dangerous. When you look at the US debt levels, potential interest rate rises in the US, US-China trade war, slowing down of the US economy with GDP figures possibly declining going forwards, potential company earnings declining and the potential unwinding of capital in US equities points towards a falling US stock market. 

The price action is telling us a different narrative right now which could change at any moment so one must follow the price action very carefully. Stock markets are a 'future price discounting mechanism'. So they are telling us what they think is going to happen around six months into the future. A lot of investors and traders forget this point. The key data to look at is the forecasts of say six months and twelve months ahead. What are the data expectations going forwards. 

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The forecasts for the US don't look too bad actually;

Interest rates Q4 2019 -  3%   

GDP Q3 - 4 2019  - 2.4%  to  2%   

Unemployment rate  Q4 2019  -  3.7%   

Dow index forecasts for Dec 2019  range anywhere between   24559 down to 21662 (which is only a revisit of the recent low)   

The current Debt to GDP for the US is historically high at 105.40 (debt was doubled under Obama) but compared to Japan's stonking  253.00 looks relatively tame.   

So certainly the forecasters aren't even looking to a recession let alone a depression.   

But of course forecasts are only forecasts. 

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These forecasts could potentially change as Brexit implications are more clearer. Also countries like India are forecasting GDP of around 7% and Trump promised so much in putting America first that GDP in Q3 from 2.4% to 2% is certainly not what many in the US were expecting. 

I agree it is not actually that bad under the circumstances.

From what I am hearing (in my circle) and my circle could be wrong is that at some point significant capital from especially US equities has to unwind and will shift into another generating better returns and providing higher yield. When this happens which could be a year to two away or may have even began but many don't realise it, US equities could slowly grind lower with large and long rallies along the way distracting the views of many.

It will be interesting to see how the longest government shutdown in US's history affects the forecasts going forwards. I also think there is a fundamental shift of GDP growth from the west now to the east. Asia is fuelling this increase and the next decade I believe will belong to Asia in terms of GDP growth.

For long term investors it is worth bearing this in mind when it comes to portfolio allocation in your investment portfolios. Obviously the growth figures released will either support my view or reject it so please do not just accept my point blindly but let the figures confirm or reject such a notion. 

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The problem with the forecasts is that they are determined by computer modelling and the input data since July 2018 has been skewered by the US/China trade dispute. But the dispute could be brought to an end at very short notice, the computer models can't forecast if or when that might happen so don't, (nor can I).

The trade dispute is affecting the forecasting of most of the economic data sets for most countries and all the forecasts will need to be rewritten if the dispute is suddenly resolved.

True that the current forecast for the US is now lower that expected before the trade dispute became embedded and demonstrates how forecasts can easily get left behind by subsequent events (see first graph).  

Interesting contrasting graphs. The first is the old US GDP growth rate forecast before the trade dispute.

The second is a new China GDP growth rate forecast during the trade dispute.





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Those charts are very interesting.

What I am unsure about is whether Brexit is going to affect the rest of the world? If so then by how much? It possibly may not have any detrimental effect to other major economies around the world but this is the part which I am finding it extremely difficult to quantify even on an assumptive basis using predictive modelling. 

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@TrendFollower  that is truly a difficult one, who even knows what Brexit is going to be, currently it looks like a deal meaning Brexit in name only and not actually leaving the EU at all.

The other question is, if there is a true Brexit, who will it hurt the most and my guess is the EU. They are not going to be able to carry on as before after losing one of the top 3 economies. No wonder they are doing everything possible to block it.

What impact would France and Germany going into recession have on other major economies around the world?

Annual GDP growth rate forecasts for Germany, France and UK (in that order). 




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The UK is making a strong push in improving its trading relationship with China. It should be trading far more with China and India based on their growth performance and potential going forwards. Also the sheer size of their markets means the potential is there and the UK should be striving to provide goods and services to China and India as they are going to be serious players in the next 10-20 years if not a lot sooner.

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How will the current Brexit scenario and risks associated with the March 2019 deadline affect the markets?

How will the current delay in US-China trade talks and also the March 2019 deadline before the US puts up tariffs affect the markets?

These are two key questions facing both investors and traders at the moment. 

Usually the markets move prior to the 'big event' in both advance and anticipation. 

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