“The market” rattled around the past several days which is quite common for over-valued markets. The shake-up came on the heels of renewed fears that the Euro-Zone is in deeper trouble than the “experts” previously thought. During those down days goods news, like today’s misinterpretation of Beige Book data, was missing. Without a “good news” distraction The Street was forced to reevaluate the reality that surrounds it. Stocks sold off accordingly (-3.3%) before recovering a small piece of it today (89 points or .7%) one the Beige Book nonsense.
Taking a longer view, the Dow is up 3.6% in the most recent twelve months, gold advanced 12.1%, and the above-average 15-51 strength Indicator gained 45.7% — 12 times better than the market Average. Here’s the picture.
The interesting dynamic to note here is gold’s movement as compared to stocks. Both the DJIA and the 15-51i experienced a small selloff in the past few days. Gold experienced an opposing gain. This contradictory dynamic, which is more evident in August/September of last year, should continue to repeat itself during the next correction.
In hostile markets like these, stock market sell-offs cause upward movements in gold. That’s why you want a gold allocation – to make money when the stock market goes down.
Bond allocations usually serve this purpose and dynamic – but with a weak currency that keeps getting weaker, near zero interest rates, and a fragile underlying economy, bonds have little upside. Bonds are only borrowed money and money right now is weak and cheap. Interest rates can only rise from here which will cause bond values to fall. This makes bonds high risk and gold the prudent hedge to stock market and cash allocations.
Stay tuned – good news or bad…