The Stock Market Isn’t the Only Financial Coronavirus Casualty

WEST PALM BEACH, FLORIDA – I’ll never forget. I was watching the stock market closely as the U.S. was getting ready to invade Iraq in 2003.

Investors were anxious about the United States going into war and the stock market was falling relentlessly… that is, until eight days before the invasion.

The stock market staged a comeback that day… and then kept rising all through the war… 

The exact same thing happened in the Gulf War of 1991. The market took off about a week before the Allies began their bombing campaign.

And to some extent, the same thing happened during World War II. The market bottomed in 1942, only six months after the bombing of Pearl Harbor, and then soared for the rest of the war, which lasted another three years…

I’ve seen this pattern many other times. The stock market seems to get anxious and panicky before a scary event. But just before the scary event begins – even if it’s something really destructive like a war – the market seems to relax and start rising.

This is why, two weeks ago – before the battle against coronavirus had even started – I suggested the stock market might start to rise soon. “If my hunch is right, the market should be forming a bottom in these next couple of weeks and beginning a rally,” I said.

And that’s exactly what has happened. Even though the coronavirus story keeps getting worse, the stock market has started to RISE. (The market rallied 21% between Tuesday morning and Thursday evening.)

Will the stock market keep rising? The epic three-day rally this week has removed most of the “big scary event” stress from the market. I can’t see an obvious “emotional” angle to keep it ripping higher. So now it’s going to depend on how the virus story plays out… what the economy will look like later this year… and if they can keep the dollar down. We’ll see.

In the meantime, I’ll get back to my regular job, which is watching the Dow-to-Gold ratio travel back down the mountain to a level somewhere below 5.

(I’m only bearish on the stock market in terms of gold… and my time horizon is five to 10 years.)

That said, if I hadn’t sold some equities and bought a little gold yet, I would be doing it NOW. The window of opportunity to take advantage of our Dow-to-Gold trade is definitely closing…

Heading Into War

The fact still remains, we are heading into a war. It’s not a military conflict but a very destructive flu pandemic. There is going to be a recession. And the economy is going to take a huge hit.

The financial fallout from coronavirus has to show up SOMEWHERE in the financial markets because it’s real money that’s being lost.

There are three places the losses from this can show up in the financial markets. They can show up in the stock market. They can show up in the bond market. Or they can show up in the currency market.

The Federal Reserve can choose to rescue two of these markets. But it can’t rescue all three. One of them has to absorb losses.

The Fed won’t let the stock market fall. And it won’t let the bond market fall. It’ll print as much money as it needs to.

So I’m betting the currency market is going to be the relief valve. And the dollar is going to fall.

(If the dollar doesn’t fall, then one of either stocks or bonds must fall. And the Fed doesn’t want either of them to fall. So the dollar has to be the casualty.)

And that’s exactly what we’re seeing.

This chart shows the dollar’s exchange rate against a basket of other international currencies over this month. This week was the dollar’s worst week since 2009.

My assumption is that the dollar’s 10-year bull market is over and it is now beginning a bear market.

It will fall in terms of other major currencies, especially euros. And it will crash in terms of gold. (I think gold is on its ways to new highs. I covered this yesterday.)

Kate and I are going to convert our remaining travel funds into euros. We have opened a euro bank account. And from now on we’ll use euros to pay for our expenses as we travel around the world.

We don’t want to hold ANY dollars any more.

– Tom Dyson

P.S. I’m often early on these market calls… and the dollar’s recent decline might be just a short-term correction. The euro is close to 18-year lows against the dollar and I’m confident in a few years’ time, we’ll be glad we made this decision, even if it was a little early.

In today’s mailbag… one reader shares how we can help doctors during the coronavirus crisis… while others ask about government gold reserves… and how gold prices are set…

Reader comment: Thank you so much for your ideas about homeschooling. Since they sounded so interesting, I have sent that information to my 20 nieces and nephews to see if those links will be useful for them. I am waiting now to see what response I get from them.

Even the few who do not have children have nieces and nephews of their own to share with. I have long been a fan of gold also, so I enjoy reading about your Dow-to-Gold ratio and watching it come down. I do look forward to reading about your family’s adventures and wish all of you the best as you continue on your journey. Be well.

Reader comment: I am a board certified emergency medicine doctor and I will tell you how you can help. We need a massive infusion of N95 masks and personal protective equipment (PPE) so those of us on the front lines are able to stay well and continue to show up to do our job, which is administering emergency and critical care to our communities. The PPE includes head coverings, face shields, plastic gowns, body suits, gloves, and shoe coverings.

We need some people to help organize a response for us and disseminate equipment to the locations that need it. I know there are folks staying at home now (rightly so!) who can help with this effort. Let’s help each other through this difficult time.

Reader question: Is it not true that the No.1 buyer of gold has been our government and No. 2 China? It would make sense to accumulate gold and then declare the price to be much higher. Can you comment on this please?

Tom’s response: The Chinese and Russian governments are the world’s largest purchasers of gold.

Reader comment: Thanks for your wonderful Postcards. My wife and I always read them first. I agree with just about everything you write, but there is one thing I don’t understand about the discrepancy between the price of paper gold and physical gold.

We all know that the futures market is much larger than the physical market and that’s where the price is set. For each contract, there’s a buyer and a seller. I can’t understand why the buyers don’t take delivery at $1,475 (as per your example), and then turn around and sell the physical gold they received for $1,800.

I know that this is not actually happening because if it were, the two prices would converge. That is the nature of arbitrage. If you could explain this to me, I would be very grateful.

Tom’s response: What you describe is exactly what happens. (Except it’s not happening now because of coronavirus gold refinery shutdowns.) There’s also a huge market in rehypothecation… which means banks lend gold to other banks that they don’t actually have – for the purpose of speculation. And selling forward the production of gold miners.

It’s complicated stuff and I don’t fully understand it myself.

Reader comment: My 26-year-old daughter is a nurse and was deployed with Samaritan’s Purse to Northern Italy this past Monday. They are setting up a 68-bed hospital that will be a respiratory care unit. She will be there for four weeks, then quarantined for two weeks before returning to work in the U.S. Their mission is to share the hope of Jesus Christ along with their medical expertise.

Reader comment: I have been following your Postcards from the beginning and have forwarded them to friends and family. I have to admit that the letters to you Friday touched my heart and brought tears to my eyes. While some know-it-alls chastised you and others called you names, a wonderful person volunteered to help your ailing mother in London. Ignore the idiots and celebrate human kindness. Stay safe.

Tom’s note: As always, thank you for your kind notes and messages! Please keep writing us at [email protected].