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One of Two Scenarios for Gold and Stocks is Developing

Commodities / Gold & Silver 2009 Jan 26, 2009 - 11:52 AM GMT

By: Kurt_Kasun

Commodities It appears that one of two scenarios is developing. Scenario A, "the meltdown scenario" means that we are in the thick of things now. This would actually be preferable to Scenario B, "the reflation scenario", which would result in an even greater meltdown after a significant "tradable bounce". Rarely does one day of trading reveal much, but Friday's trading was spectacular. 

It appeared that scenario A was in effect as gold moved sharply higher at the opening and the other commodities (keep your eye on silver and oil and its relationship to gold) moved lower with the overall market.  But silver and oil scored extremely impressive reversal rallies with oil's gains actually outpacing gold's by day's end. 

This strongly suggests that the reflation trade could be back on.  Key levels to watch on the S&P 500 are 800 and 840.  As you can see from Friday's activity gold investments should do well in either environment.  My preferred investment vehicles are DGP (NYSE: DGP ) and GDX (NYSE: GDX ).  Gold smashed through a key resistance-level around $875/oz and closed around 895. 

As I wrote below I expect a quick move to 925, but you will likely get a test back down to 875 which should now serve as support and possible entry point.  I am, however, leaning toward scenario B in which case the gains in energy and silver will best that of most gold investments.  Leveraged ETFs are DXO (NYSE: DXO ), ERX (NYSE: ERX ), AGQ (NYSE: AGQ ). 

I prefer to own shares of (NYSE: SLW ) over the AGQ ETF because the volume is still too low and the spread too high on it.  A move below 800 on the S&P 500 would quickly cause me to exit my silver and oil positions and possibly purchase shares of leveraged market-short ETFs (while holding my gold positions).   A move above 840 would confirm scenario B in which case I would add to silver and oil positions.

Normally I refrain from such trading, but I think we have been given a gift of clarity for either of these two scenarios.

By Kurt Kasun

A contributing writer to , Kurt Kasun writes a high-end investment timing service, GlobalMacro, which is focused on identifying opportunities that produce returns in excess of market with reasonable risk. He is strategically located in Washington , D.C. , a key to maintaining contacts and relationships which help Kurt understand global policy and economic factors as they emerge. His investment approach has always been macro in nature largely due to his undergraduate studies at the U.S. Military Academy at West Point (B. S. National Security, Public Affairs, 1989) and his graduate studies at George Mason University (M.A. International Commerce and Policy, 2006).

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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