The Market Goes Up and Down but in the End Gold Wins

* Yesterday’s down trade in the stock market was ushered in with concerns about growth in China, and proceeded to cause concerns about the shape of the economic recovery in the US. With an almost 10% unemployment rate, all we have had is a respite in the state of corporate affairs. Of course, corporations have been trimming their head count in short order ever since the financial crisis of 2008 enveloped the rest of the economy. The survival of corporate America has meant that companies will do whatever they need to, to insure their survival and prosperity. The concept of job security no longer applies in corporate America. So while everyone is cheering the stock market’s rise from March 2009 to April of this year, 8 million more Americans have lost their job since this recession/depression began.


The S&P briefly pierced 1040 yesterday, and this is a critical support level. The fact that the market is back down here is a negative omen. Over the short term, it looks as if stocks will stabilize and bounce a modest amount. But my overall conclusion is that the market will take out 1040, probably after a retest somewhat higher (1075 likely). And if the Elliott Wave interpretation I mentioned yesterday is correct, then we will be in for a dramatic fall (at least 13% in 8 trading hours), sometime soon. I remain on high alert for such an event, although I am not sure what bad event will occur to cause such a fall. Perhaps the payroll report on Friday will seal the deal and turn consensus decisively bearish.


* At the start of the day yesterday, Obama and Bernanke had a press conference following their meeting, and assuaged America that the economic recovery was on track. Of course, this gave the markets great comfort, so much so, that the stock market traded down another 1.5% over the course of the rest of yesterday’s trading session. Whenever Bernanke talks, I recall his 2007 pronouncement that the subprime problem will remain contained. Bernanke made a similar public statement that the problems with the EU will not have an influence on the US economy. Despite his public statements about the EU, Bernanke managed to have a “closed” meeting with Congressional finance panels. So it is with the same warm and fuzzy feeling, that I take a great deal of comfort from Bernanke’s rosy pronouncements.


Ironically, Bernanke’s comments yesterday we in stark contrast to the Fed’s rather cautious statement at the conclusion of their FOMC meeting last week. In case you missed it, here is the first paragraph of the Fed’s press release following last week’s meeting:


“Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.”


This does not sound like a great assessment, and hardly indicative of an improving economic environment. Call me a “Doubting Thomas” if you like, but the optimistic assessment by Obama and Bernanke is in sharp contrast to the Fed’s latest statement. In fact, what followed the first paragraph of the Fed’s statement was a continued pronouncement that the Fed will keep rates low ‘for an extended period of time’. Go fish!


* Gold – Throughout the recent down-trade in stocks, which began at the end of April, the Gold to S&P price ratio has improved by 20%. The initial surge higher in this ratio (see the attached chart), was in response to the failure of the Euro, declining stock prices, and a flight of capital into the safe harbor of precious metals. And while stocks were declining over the last week, gold has managed to stay in a 1235 to 1265 trading range, pushing the gold/S&P ratio above 1.19. The deflationists will argue that gold will get dragged down with stocks, as they did in the fall of 2008. While stocks have not been taken as low today, as they were in 2008, it is apparent that gold is marching to its own drummer. Ultimately, the Gold/S&P ratio could go as high as 7:1, which is where it was in 1980. (In comparison, gold was about 3 to 4 times the S&P in the 1930s). So, according to the 1980 metric, gold could rise 600%, with no change in stocks, or stocks could drop by 70%, with gold doubling in price. Despite current weakness in stocks, gold’s performance is symptomatic of a trend which is just gathering momentum.


I often ask folks if they own gold. The typical response is that they would buy gold, but with the metal near its all time high, it about done moving higher, and has no upside. Even people who believe that gold is a good investment, refuse to buy into gold. Another classic response heard from many, is: “When I went to buy gold, but my financial advisor said I was crazy, and that it was a bad investment. And no matter how much these people told their broker they wanted to buy gold, they never pulled the trigger.” You see, for the last 2 years, gold has been making higher highs, and higher lows. Investors have not been allowed to get into the trade at what they consider to be a reasonable level, so instead they watch gold go higher, un-invested. There are far more people who are not in gold than who are in, despite the high percentage of professional traders who are in the trade. And this is one source of demand for future purchases.


Gold, as an alternative currency, has basically been repudiated by the developed countries since the US went off the gold standard in 1971. But, for some reason, the developed countries still manage to hold the largest amounts of currency reserves in gold, of all the countries in the world. Over the last couple of years, Saudi Arabia, China, Russia and India, all countries with trade surpluses, have shifted sizeable amounts of reserves into gold. Nonetheless, these countries cannot keep up with their growing surpluses, and despite large purchases of the yellow metal, gold is only a minor portion of their currency reserves. This I believe will change. These countries have started accumulating gold, and should be expected to continue in this direction. 


For me, gold is not an investment, but rather a way in which I am going to preserve the value of my savings. While that sounds like I am hedging against inflation, I am well aware that property markets are likely to deflate, while other commodity groups will inflate. A sinking world economy will temper the inflation of various commodity groups, but not entirely. And gold will manage to be the least affected of the various commodity groups, in my opinion. I expect to see the Gold/S&P ratio to hit at least 3, as it was in the 1930s, and possibly much higher. Say no to stocks, and say yes to gold.