Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

A Weak Economy Remains Gold's Best Friend

Commodities / Gold and Silver 2012 May 03, 2012 - 01:01 AM GMT

By: Jordan_Roy_Byrne

Commodities

Best Financial Markets Analysis ArticleIt was Bob Prechter of Elliott Wave fame, likely among others who noted that correlations between all asset classes are quite strong during a Depression. This is true in a cyclical sense but not in a structural sense. Stocks tumbled in the 1929-1941 period while commodities, led by Gold and gold producers, increased in value. We've experienced similar phenomena in the past 12 years. Cyclically, there has been a correlation between these asset classes. Structurally, stocks have been in a bear market and resource sector has been in a bull market. The driving force has been a weak economy and bear market which usually leads to more inflationary policy, which in turn benefits the resource sector. Are we soon to see a replay of this scenario?


Despite unprecedented monetary inflation, stimulus and bailouts, the economy has barely recovered. The chart below (from Doug Short) displays post-war real gdp growth. The black line shows the 10-year average which has been in a steep decline since 2006. At the time, the Bush II recovery was the weakest on record. It has been surpassed by a pathetically weak recovery (statistically) under Obama. The growth rate in each of the past seven quarters has been below the the 10-year moving average.

Real Gross Domestic Product

Meanwhile, economic data as a whole is okay but is currently failing to meet expectations. The Citigroup Economic Surprise Index, (economic data relative to expectations) has gone negative for the US, and the rest of the world is not far behind. Clearly, continued disappointing economic data combined with any weakness in equities would prompt more Fed action. Judging from what happened in 2010 and 2011, it is a near certainty.

It is important to note the current position of the markets in contrast to a year ago. Currently, precious metals are bottoming while equities are nearing multi-year resistance. This decoupling, shown in the chart below, began in the aftermath of the mini-Euro crisis.

$SPX (S&P 500 Large Cap Index) INDX

Other than 2001-2002, we haven't seen an extended period of decoupling between precious metals and equities. However, that doesn't preclude the possibility in the coming years. In fact, there are two cases of a decoupling during the 1970s. In the chart below we graph the S&P 500 (blue) and the Barron's Gold Mining Index (red, and scale numbers adjusted).

S&P 500 vs Barron's Gold Mining Index (BGMI)

The period from 1971-1972 bears quite a bit of resemblance to 2011-2012. The S&P 500 (blue) continued to make new highs while the gold stocks (red) remained in a long-term consolidation that included two corrections. However, decoupling would soon benefit the gold stocks as they rose more than 4-fold in less than 18 months. Oh and during that period, the S&P entered one of its worst bear markets on record. Finally, note that the next major bottom in the gold stocks in 1976, coincided with a top in the S&P 500.

The current decoupling of precious metals and equities combined with an unsustainable recovery provides insight into the future. With equities nearing major resistance and precious metals emerging from an important low, it is obvious which asset class is in position to benefit from disappointing economic data and which asset class could enter a mild cyclical bear market. Equities have already experienced two nasty bear markets and two recessions. Though still in a secular bear, the likely outcome of the next few years is far more likely to be something on the order of the late 1970s and not the mid 1970s.

The combination of the failure of equities to make new highs and continued disappointing economic data would likely serve as a catalyst to ignite the precious metals sector while equities could enter a situation similar to the late 1970s. The potential struggle of equities combined with a resurgence in precious metals will ultimately attract the hot money inflows that we have not seen since 2006-2007.

If you'd like professional guidance in this endeavour then we invite you to learn more about our premium service.

Good Luck!

Jordan Roy-Byrne, CMT
Trendsman@Trendsman.com
Subscription Service

Trendsman” is an affiliate member of the Market Technicians Association (MTA) and is enrolled in their CMT Program, which certifies professionals in the field of technical analysis. He will be taking the final exam in Spring 07. Trendsman focuses on technical analysis but analyzes fundamentals and investor psychology in tandem with the charts. He credits his success to an immense love of the markets and an insatiable thirst for knowledge and profits.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules