Monday, October 19, 2009

Gold and the Stock Market

I know the hard-core deflationists and Prechter followers are still waiting for Gold to collapse when the stock market takes its next brutal leg down. While I agree with such persons when it comes to the stock market, I disagree on Gold. Gold has started another strong bull leg higher. The stock market won't stop it from happening. A rise in the US Dollar Index won't stop it from happening. The Gold bull market is an independent secular bull market with its own drivers that include things besides US Dollar weakness.

Here's a busy 4 year weekly chart comparing a green area plot of the price of Gold in US Dollars versus the S&P 500 (black line plot) to show you what I mean:

People think a declining stock market will drag down Gold, but this is only true during true "panic" liquidations where everything is sold indiscriminately to raise cash. The coming leg down in the stock market will be nasty, but it will happen in stages. The break-out in Gold is sending a powerful message and most Gold stocks will continue to respond to it. Yes, there will be corrections along the way. At least I hope so, because this gives the move strength to continue higher before exhausting. The important point is that being bullish on Gold and Gold stocks and bearish on the stock market are perfectly compatible views.

The general stock market continues to defy gravity for a few more days. Man, have I been humbled by this move. Even though I know the end is very near, it went higher and stayed high much longer than I thought was feasible. Here's a look at the equity put to call ratio over the past 4 years, using the 8 day moving average rather than the raw data to create a less noisy plot:

The Volatility Index ($VIX) dipped below 21 today! The bear market in general stocks is far from over but this rally has been extremely powerful and rapid. Bearishness is gone and so yesterday's news. It is almost heresy to say that this is still just a bear market rally. Anyone who still believes in the efficient market hypothesis should be labeled mentally unstable. The recent strength in Gold is warning of the next phase in the ongoing secular credit contraction and the next leg down in the general stock markets. It should prove to be quite interesting...

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