Gold Diverges From The Equity Market

By Surly Trader

Since the beginning of the year we have witnessed a divergence between gold and equities.  The question is whether we are entering into a shift between inflationary fears caused by wild printing presses over to the start of fiscal tightening brought on by solid economic growth.

Gold/SPX correlation no longer 1?

In the past few years, the big joke has been that even though equities have rallied significantly, the dow is still down over 57% since 2007 when priced in terms of Gold.

Has the equity market really gained any real value?

The real bet seems to be whether gold has finished its run and my short-term view is that it has not. The market might be underestimating Bernanke’s desire and tenacity with regards to restarting the economy and lowering the unemployment level.  I believe that the Federal Reserve’s continued mandate is that it wants to make absolutely sure that a deflationary Japanese outcome has no probability of occurring.  In addition to the mandate, they probably take solace in a false perception that if inflation spikes they will be able to tame it as Volcker did in the early 80′s.  Inflation and tightening will come, but it is hard to foresee that with over 9.5% of the population unemployed.

What this view implies is that writing out of the money put options on gold might not be such a bad strategy.

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by Andrew Wilkinson, Senior Market Analyst at Interactive Brokers

Read more at The Pragmatic Capitalist