Gold Losing to Stocks, Rising vs. Commodities
Wednesday, 9/03/2014 11:30
Gold is losing badly to the S&P stock index. Its rise vs. commodities might signal trouble...
I WAS listening to Martin Armstrong talk about his 'economic confidence' model and realized that the way he views gold is similar to the way I do,
writes Gary Tanashian in his Notes from the Rabbit Hole.
That's very dis-similar to the way inflationists and 'death of the Dollar' promoters do.
I don't love the way Armstrong writes, and I usually avoid these weird interview sites, but
having checked it out anyway, I found him enjoyable to listen to. It also prompted another big picture look at gold vs. the S&P 500 stockmarket index.
As with the shorter-term views, the picture is not pretty...
Well, it is pretty if you have patience and no need to promote gold as a casino play. Gold will be ready when gold is ready and that will not be until confidence in policy making and by extension the stock market, starts to unwind.
Gold vs. SPX has meandered out of a long Falling Wedge (blue dotted) with 2008′s Fear Gap still lower. On the big picture the risk vs. reward is with gold over the stock market. But it is a funny thing about big pictures; they move real sloooow. A fill of that gap may not feel so good to anyone vested in an immediate conclusion to gold's bear market vs. SPX.
Gold bugs ruled the financial asset world for 10 years from 2001 to 2011. But gold is not an asset so much as it is a barometer to the climate in the asset and currency worlds. Its function is to provide liquidity when confidence erodes in the traditional sources of liquidity, which in our system, is centrally planned interest rate policy. It is not supposed to do well when policy is working as planned.
This chart is the Gold-Commodities ratio, which has broken upward over the last 3 months, in line with the nominal S&P 500 (green line).
Gold-CCI says that short-term trouble could be coming for the stock market, but it is not clear whether this would be a terminal event or a healthy correction of excesses paving the way for higher stock prices in 2015.
General commodities (oil, gas, grains, base metals, etc.) are assets and building blocks in correlation with society in general and its growth prospects in particular. Gold is the counter weight or the thing that the progress of positively correlated things is measured against.
Gold-CCI is turning up and indicating caution. Yet US and some global stock markets remain bullish. I think the weeks post-Labor Day are going to bring a knock down of some kind. Gold-CCI brought US stock market destruction in 2008 (US financial meltdown) but only a healthy correction in 2012 (Euro meltdown).
For the US stock markets to invalidate the upside potentials noted in this post, market disruptions would probably have to originate in the US. The US economy is fine, credit markets are on mixed signals and stocks are obviously fine in the face of QE tapering, but with ZIRP's end point still way out on some hazy horizon.
If disorder were to center on Europe again, as it did in 2011/2012, the 'safe haven' US would probably only take a healthy variety correction, as it did in 2011. If the disruptive force is Russia and Ukraine or some combo platter of geopolitical events, bears should book gains nimbly because stocks would likely be headed directly for new highs when the hype wears off.
Once again a post starts out one way and just rambles on until it exhausts itself. The thing with today's complex markets is that there is so much to write about and so many different angles from which to view and write about the markets. So on a day when I am not watching closely, a rambling post tries to make a bunch of points and hopefully makes some sense to you.
There is plenty time to sort it all out if you do not lean too strongly one way or the other. Time and perspective are good things in a complex environment because they keep you free from the grips of firmly embedded viewpoints based on outmoded information. Or something like that.
One thing for sure, the environment is getting fun (fun for me being an environment in which I feel totally engaged) for me personally because the stock market's current robo trend aside, it appears that going forward people committed to doing real analytical work – as opposed to assumptions based stuff – will get by just fine as the bearish and bullish turns to come play out.
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