Monday, March 16, 2009

Actually, Gold Poised To Rally WITH Stocks

Quite possibly, one of the biggest fears in Gold Bugs minds today is that if stocks should rally, Gold should crash. History says that does not seem likely. Golds natural inverse relationship to the US Dollar would also say that is unlikely.

Gold has rallied twice to $1000 now, mainly on waves of safe haven buying. Gold buying based on its usefulness as an inflation hedge has hardly been recognized yet. Consider if you will the fact that the Dollar has been rallying as stocks have been tumbling. Strangely, Gold has rallied right along with the Dollar as stocks fell, particularly over the past two months. But is it that strange? Gold is and always has been a "safe haven" during times of financial crisis. In many ways, so has the Dollar.

The not-so-safe haven [must read]
Like it or not, the US dollar still constitutes the de facto central framework of the present global financial order - the dollar is its fundamental support structure, much like the steel framework that supported the Twin Towers in New York. The global crisis is sending shockwaves of ever increasing intensity throughout the present order. Few thought the shaking would reach its present intensity and scope, and no one really knows how powerful and destructive the shaking might get before the crisis is over.

The initial, knee-jerk reaction in this situation has been to reach out and grab tightly onto the framework with both hands (that is, in an exceptionally risk-averse reflex, flee into the dollar for relative safety) and hold on for dear life. This reaction of global investors is motivated partly by logic but also in large part by the strong psychological components of uncertainty, fear and even panic.

The massive global rush into the dollar as a safe haven would appear to indicate that we don't have much to worry about respecting international trust and confidence in the dollar. That might well be true if it could be clearly established that such a global move has been strategic in nature and well thought-out and as such has come as a result of rationality, logic and reason much more than being merely a tactical move as a result of fear and panic. Some important questions must be posed here:

Are investors such as China, which likely holds 70% of its reserves in dollar-denominated assets, satisfied to remain in the dollar for the foreseeable future, and satisfied to increase exposure to the dollar, or do its central bank governors increasingly find themselves having to hold their noses, as it were, with respect to their exposure to the dollar? Is their concern flaring?

Are global doubts and fears mounting with respect to the appeal of the dollar as a safe store of wealth beyond the short term?

If the answer to the question above is yes, then is the appeal of the dollar being undermined mostly because of fears over the potential effects of the dollar-debasing policies that are now irreversibly being implemented in Washington?

Are key investors like China's central bank increasingly looking for ways to reduce exposure to the dollar?

Is the dollar facing significantly increasing competition from other safe haven stores of wealth, such as gold?

Gold's increasing appeal as a safe haven, demonstrated by its ongoing surge, adequately answers the last question. From the start of January 2009 until mid-February, gold has surged from around $800 per ounce to near $1,000 per ounce and is likely to rise further. This surge coincides with the raft of official data releases since the start of 2009 that demonstrate the US and global financial systems and economies are moving deeper into crisis. Investors increasingly see the value of investing in hard assets, and in times of uncertainty and crisis gold and other precious metals are usually the ultimate investment in that category.

And what happened to the Twin Towers when the steel framework melted? And what do suppose will happen to the World Economy when the US Dollar melts down? Bin laden knew exactly what he was doing....

But we were wondering about a rally in stocks. Will Gold crash with a rally in stocks? NO. The US Dollar will. And once the Dollar begins to crumble, inflation takes over and the price of everything begins to rise: Oil, wheat, copper, corn, Gold, Silver. If it's a commodity, the price will rise with a falling Dollar. The price of stocks will rise, the prices of homes will rise...the price of EVERYTHING will rise. The US government has set us on a path of destruction far worse than anything we are witnessing today. Far, far worse... Shortages created by the "scare" of deflation today, will exponentially force prices of commodities ever higher, much higher than just the inflation will.

Gold and the SPX [must read]
Adam Hamilton March 13, 2009
As you know, between March 2003 and October 2007 the SPX powered 95.5% higher in a mighty cyclical bull market within a secular bear. With so much stock strength, if there was ever a time when demand for safe-haven assets faded this period had to be it. So was gold beaten to a pulp as the stock markets reached for the heavens, like traders expect today?

Not so you’d notice! To the very days of this long and strong 55-month SPX cyclical bull, gold powered 110.4% higher which exceeded the stock markets’ gains. Gold, marching to the beat of its own inherently bullish fundamentals, moved higher in a parallel bull market. Powerful multi-year bulls in the stock markets and gold are clearly not mutually exclusive. Gold can and does thrive even when stocks are strong as long as its own independent
fundamentals remain bullish.

There is certainly some interplay between the fortunes of the stock markets and capital flowing into gold. Gold’s appeal as an alternative asset is definitely higher when traditional investments are not faring well. But realize that the relationship between gold and the SPX is far more nuanced and complex than merely a direct inverse or even parallel relationship. The SPX is not, and never has been, gold’s primary driver.

I looked at gold versus the SPX over a variety of major spans which are noted above. Gold was not only up more than the SPX during stocks’ long bull, but it far outperformed the SPX during the nasty bear we’ve suffered. Between October 2007 and this past Monday, a horrific span where the SPX lost 56.8% of its value, gold actually rallied 24.8% to the very days. Gold tends to thrive during stock bears in history.

But this is a general relationship that is most apparent over long spans. If you carve the data into shorter spans, every possible relationship between gold and the SPX can be observed. For example, from gold’s all-time nominal high in March 2008 to its panic low in November 2008, this metal fell 29.3%. Over this same slice of time the SPX bled 33.2%. Periods like these when gold travels parallel with the SPX cause problems for the gold-opposing-stock-markets thesis.
In the most recent major period for gold, from its November lows until late February, the metal powered 39.6% higher. Over this period of time the SPX fell 12.8%. This particular period buttresses the gold-opposing-stock-markets argument and is the major reason why this thesis is growing in popularity today. But just like during gold’s parallel bull market with the SPX from early 2003 to late 2007, gold’s behavior relative to the SPX since its extreme volatility erupted last summer is also nuanced and complex.

During the most intense stock-market months seen in our lifetimes, gold paralleled the SPX’s direction. This is provocative because the coming SPX rally ought to be extreme too given the incredible degree of oversoldness it has weathered. You can certainly build the case based on gold’s recent performance that it is far more likely to follow an extreme SPX rally higher than wither and die as many traders expect.

It is not that gold is positively or negatively correlated with the stock markets, but that gold is simply not correlated with the stock markets lately! Sometimes gold and the SPX happen to both be rising, other times they both happen to be falling, and still other times they diverge for a spell.

During the stock panic, investors dumped everything (including gold at times) to exit the chaos and raise cash fast. They moved this cash into short-term US Treasuries, which seemed like the safest place for capital at the time. But foreign investors, after selling stocks in their local markets, had to first buy US dollars before they could park in US Treasuries. This drove an unprecedented dollar rally. As futures traders saw the dollar skyrocket, they sold gold aggressively. It was really something to behold.

The inverse correlation between the SPX and the US Dollar Index (USDX) was stellar, especially on particularly fear-laden days of intense SPX selling. The USDX hit new rally highs on the very days the SPX fell to new lows in October and November and then again in the last couple weeks. Falling to new bear lows in the SPX always drove dollar buying, and the resulting incredible USDX strength often hit gold. So in an indirect way via the dollar, the stock panic did indeed affect the gold price.

Provocatively though, this indirect relationship actually means that a major SPX rally will be very bullish for gold, not bearish. As the inevitable SPX recovery rally accelerates, this USDX trend will reverse. Capital hiding in Treasuries will exit to hunt for the widespread bargains in the stock markets. Foreign investors will sell their Treasuries and then sell their dollars to repurchase their local currencies to buy stocks on their local exchanges. Thus the US dollar should fall fast in an accelerating SPX rally.

And a falling dollar means futures traders will get really interested in gold and bid it up rapidly. So due to the dollar’s unique role in this crazy stock episode, there is actually a very high probability that the SPX’s recovery will indirectly lead to a big surge in gold. This relationship is only apparent through careful study though. If you let your emotions take a recent day or two of gold opposing the stock markets out of context, you’ll totally miss it.

The bottom line is this. Gold Bugs need to immediately quit looking for reasons to sell their Gold, and start embracing the countless reasons to own Gold. The daily nonsense on the CRIMEX is just that, NONSENSE! No physical Gold is being bought OR sold on the CRIMEX. The CRIMEX is a den of derivatives managed by the long arm of the US Federal Reserve: JP Morgan. JP Morgan is a financial nuclear accident waiting to's days are numbered. If you have paid in full, and taken possession of your Gold and Silver, you have NOTHING to fear, but fear itself. If you control Gold and Silver with margin you know, or should know, that there is risk, but the risk is more to the upside now than down. Shorting these markets is a fools game. Traders, buy weakness and sell strength, pure and simple...don't focus on the tops and the bottoms in moves, focus on the middle of the moves if you must trade...that's where there's money to be made. Above all else, scoff at any suggestion that Gold is in a bubble. Nothing could be further from the truth.

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