Here we go again. Another tariff announcement and another analogous reaction (a smaller one, though).
The implications are also just like they were before. In short, the immediate-term impact was positive for commodities and precious metals (well, it’s unexpected and chaotic), but this is not likely to be the case in the medium term. Those effects are likely to be reversed shortly, and we even have technical confirmations for it.
I wrote about it in greater detail in the March 5 Gold Trading Alert, so if you haven’t had the chance to read it so far, I encourage you to do so today.
In short, here’s how the situation looks like:
Trump's latest tariff announcement targeting Canada brings us right back to familiar territory. As of Tuesday morning, he announced plans to double tariffs on all steel and aluminum imports from Canada to 50%, effective Wednesday morning. This comes in response to Ontario's 25% duty on electricity exports to the U.S. He's also demanding Canada drop its "Anti-American Farmer Tariff" of 250% to 390% on various U.S. dairy products and is declaring a National Emergency on electricity within the affected area.
The market's immediate reaction has been predictably negative – the S&P 500 fell 0.8%, the Nasdaq 100 shed 0.5%, and the Dow dropped 1.1% in early trading. This mirrors what we've seen with previous tariff announcements, though notably, the magnitude of the market's response is more muted this time around.
Why This Matters for Precious Metals and Copper
As you may recall from my previous analyses, there’s a specific pattern when tariffs are announced:
- Initial emotional market reaction (typically negative for stocks, positive for gold/metals)
- A short-lived rally in copper and precious metals
- Followed by a reversal and significant downside movement
The key difference today is the diminished market reaction. This "tariff fatigue" actually strengthens our bearish case. Why? Because a smaller reaction to the same type of news indicates market exhaustion – there are fewer buyers left to push prices higher, even when presented with what previously would have been considered bullish catalysts.
The USD Factor
In my March 5th Gold Trading Alert, I detailed how, contrary to initial impressions, tariffs historically strengthen the USD after an emotional selloff period:
- During the 2018-2020 trade war, the Dollar Index rose approximately 9%
- Steel and aluminum tariffs in 2018 boosted the dollar by 2-3% a month after announcement
- Even sector-specific tariffs have typically led to modest USD strengthening
The fact that markets are showing less dramatic reactions now further suggests we're closer to the reversal point where the USD will begin to strengthen – a development that typically coincides with weakness in precious metals and commodities.
Copper's False Signal Repeating
Just as we saw previously, copper has shown a small bounce on tariff news. But as we explained in detail with historical evidence, these tariff-induced rallies in industrial metals tend to be short-lived, ultimately giving way to deeper corrections.
The smaller magnitude of today's reaction compared to previous tariff announcements suggests the bullish energy is being depleted. Market participants appear increasingly skeptical about the sustainability of these news-driven bounces.
And FCX’s reaction?
Barely visible and pathetic.
This stock really wants to slide here. Buckle up, it’s likely to be a wild ride lower shortly. My subscribers’ profits on FCX are likely to greatly increase soon.
Mining Stocks: The Warning Signal Intensifies
Mining stocks continue to exhibit relative weakness despite today's news, which would typically be considered supportive for the sector. This divergence between what "should" happen and what is actually happening reinforces our view that the broader trend remains bearish.
As I've consistently noted, when mining stocks fail to respond enthusiastically to seemingly positive catalysts, it's often a warning sign of underlying weakness in the entire precious metals complex.
Gold moved close to its recent intraday highs, silver moved above them, and miners were weaker – they didn’t move that close to the recent highs. This means that:
- Silver outperformed gold on an immediate term basis, which is a sell signal.
- Miners underperform gold, which is also a bearish confirmation.
The Pattern Is Clear
The repeating pattern we're observing with each tariff announcement is getting more defined:
- Initial knee-jerk reaction in metals (smaller each time)
- Brief consolidation phase
- Most likely to be followed by continued movement in the direction of the primary trend (down)
Today's more subdued market response to significant tariff news isn't a reason to question my bearish thesis – it's actually confirmation that market participants are increasingly positioning for the downside scenario that I've outlined.
This pattern reinforces my view that precious metals and copper are setting up for a significant move lower, not higher, despite what conventional wisdom around tariffs might suggest.
Also, let’s not forget about the most important market all this commotion is affecting – the U.S. stock market.
This might be just the trigger the market needs to move lower – MUCH lower.
Why would stocks fall MUCH lower from here?
Well, why did they fall so much almost 100 years ago? Yes, there are numerous analogies between both cases:
Extreme Valuation Metrics Signal Caution
The S&P 500-to-GNP ratio currently sits at approximately 22, the second-highest level in recorded market history. Before the 1929 crash, this ratio peaked at around 28 - nearly triple its long-term average. While we haven't quite reached those historical extremes, current valuations remain in rarified territory that has historically preceded significant market adjustments.
Similarly troubling is the Shiller CAPE ratio (cyclically adjusted price-to-earnings), which currently exceeds 30 - a level reached only a few times in history: before the 1929 crash, during the late 1990s tech bubble, and in recent years. Historical data shows that starting CAPE ratios above 30 have typically led to poor 10-year returns.
Unprecedented Yield Curve Inversion Duration
The current yield curve inversion has persisted for approximately 793 days - the longest such period in modern financial history. This exceeds even the 700-day inversion that preceded the 1929 crash and Great Depression. Yield curve inversions have predicted every recession since 1955, but the extraordinary duration of the current inversion suggests potential economic stress beyond typical recessionary pressures.
Speculative Sentiment and Narrow Market Leadership
The "Magnificent Seven" tech stocks now account for over 30% of the S&P 500's market capitalization, creating concentration risk reminiscent of the 1920s, when a small number of "blue chip" stocks drove market performance. In both eras, investors piled into a narrow group of stocks perceived as unstoppable.
Today's AI investment mania shows annual growth rates exceeding 300% in related ETFs, mirroring the speculative atmosphere that characterized the "Roaring Twenties." The media narratives about "$1 trillion market opportunities" echo the 1929 assertions that markets had reached a "permanently high plateau."
Deteriorating Market Breadth Despite Index Strength
Market internals show significant deterioration despite headline index strength. The NYSE Advance-Decline line has failed to confirm recent highs, and the percentage of stocks trading above their 200-day moving averages has declined markedly - patterns remarkably similar to 1929, when market breadth weakened 6-8 months before the crash.
This divergence between index performance and broader market participation suggests an underlying weakness masked by a few large companies' performance - a classic warning sign that preceded major historical market tops.
Record Margin Debt Levels
Margin debt has reached historic highs relative to GDP, indicating excessive leverage in the financial system. According to FINRA data, margin debt has surpassed levels seen before other major market peaks. This mirrors the margin-fueled speculation of the late 1920s, when investors increasingly borrowed to purchase stocks, creating financial fragility that amplified the eventual market decline.
Rising Income Inequality
Income and wealth inequality metrics have reached levels not seen since the late 1920s. Research from economists Emmanuel Saez and Gabriel Zucman shows that the top 0.1% of Americans now hold nearly as much wealth as the bottom 90% - a distribution remarkably similar to pre-Depression America. Historically, such extreme inequality has often preceded financial instability by reducing broad-based consumer spending power while concentrating investment in speculative assets.
Monetary Policy Overreach
The Federal Reserve's current restrictive monetary stance follows an unprecedented period of accommodation - creating conditions eerily similar to the late 1920s. After years of easy money policies, the Fed's aggressive tightening threatens to overshoot its targets, potentially triggering financial system stress. The duration of the current restrictive policy exceeds anything in modern financial history.
Global Trade Tensions
Recent tariff proposals and growing protectionist sentiment echo the disastrous trade policies of the early Depression era. The Smoot-Hawley Tariff Act of 1930 significantly worsened economic conditions by strangling global trade. Today's increasing trade barriers could similarly amplify economic vulnerabilities in an already-fragile global economy.
Banking System Stresses
Recent regional banking failures highlight stresses in the financial system that parallel pre-1929 conditions. While regulatory reforms have strengthened major institutions, the sudden collapse of Silicon Valley Bank and other regional banks in 2023 revealed vulnerability to rapid interest rate increases - similar to how smaller banks failed before the broader 1929-1932 financial system collapse.
Implications for Financial Markets
If markets were to follow a trajectory even remotely similar to 1929-1932, the implications would be severe. A comparable percentage decline would take the S&P 500 from recent highs around 6,144 to potentially as low as 850-1,230, erasing decades of gains.
Such a scenario could see:
- The S&P 500 potentially retracing to levels not seen since the late 1990s
- The erasure of most or all gains since the 2009 financial crisis
- A recovery timeline potentially measured in decades rather than years
Gold and Mining Stock Considerations
Historical patterns suggest that after initial selling pressure (as margin calls force liquidation of all assets), precious metals and quality mining stocks often dramatically outperform during periods of financial system stress.
Please note that the emphasis is on the word “after”. Initially they would all be likely to slide – just like what we saw in 2008 and 2020.
Following the 1929 crash, once the initial liquidity crunch passed, gold mining shares delivered exceptional returns. Homestake Mining advanced over 500% from 1929 to 1935 while the broader market remained deeply depressed. This performance coincided with the government raising the official gold price from $20.67 to $35.00 per ounce in 1934.
This historical precedent suggests maintaining positioning for potential opportunities in the precious metals sector could prove valuable during periods of broader market distress - particularly given the technical breakdowns we're already observing across multiple asset classes – including the S&P 500 itself.
After the failed attempt to move to new highs, stocks plunged below their rising support line and also below their mid-2024 high. On a side note, I left my original annotation on the chart intact. I previously wrote that the breakdown below the rising support line is likely to lead to a “truly exceptional” decline – and one appears to have indeed started.
A Balanced Perspective
While these parallels are concerning, maintaining perspective is important. Not every market with high valuations experiences a 1929-style crash. Different policy responses, market structures, and economic conditions could lead to different outcomes.
However, the constellation of indicators now present suggests extraordinary caution is warranted. The technical patterns we're tracking in gold, silver, and mining stocks suggest we may be approaching a significant inflection point across major asset classes.
I’m not predicting with certainty that a crash of 1929 proportions is imminent. I am, however, noting that extraordinary number of factors are similar, and since the technicals also point to a bigger decline, it seems to me that being positioned to benefit from the declines instead of being positioned to be hurt by them is a great way to go.
Miners and FCX are my favorite ways to benefit on this likely decline, but I think that many other assets (yes, cryptos too) will plunge along with stocks.
Before wrapping it up, I’m once again encouraging you to reserve your seat for tomorrow’s special webinar.
Even the best market analysis fails if psychological barriers cloud your judgment. Lech will show you how to identify and overcome the hidden mental patterns affecting your financial decisions. Topics covered:
· Why your brain resists beneficial changes
· How to recognize self-sabotage in your investment approach
· Techniques to trust your analysis instead of seeking validation
· A framework to challenge limiting beliefs and take decisive action
This webinar comes from Lech's successful "Get Out of Your Own Way" course, now applied to investment psychology.
I strongly recommend that you check out this webinar – it’s tomorrow at 10 AM EST (5 PM CET). Confirm your seat now.
As always, I’ll keep my subscribers informed (this includes the up-to-date profit-take levels that today’s Gold Trading Alert along with special option specifications).
===
If you want the best, you'll find it in our Diamond Package. There are many other premium plans available (like my Gold Trading Alerts), though. Choose the one that suits you the most.
And if you'd simply prefer to stay up-to-date with what we have available for free, our free gold newsletter would be a good choice -- sign up today.
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief