Todays pop quiz is can you name the market in purple that is so closely attached to the GOLD market? In reality I should have displayed this the other way around, because it is GOLD that is following it, but it does not really matter. Look how closely the price swings are tied to one another. I have talked until I am blue in the face about the intermarket correlations that are currently in place. This just shows graphically what I am talking about and why it is so important to be aware of the big picture of what is linked to what.
The answer to the quiz question is..... The SP 500. The purple line is the closing price of the SP 500 overlayed on top of the price of GOLD.
If you look at this chart closely there is something incredibly valuable to be learned. GOLD always comes back into line with the stock market when the two have diverged for short periods. You can see a few example of where stocks started down in late April and GOLD continued to rise, but yet look at the catch up move that ensued. GOLD came down sharply to get back in sync. There is another example in mid June of where stocks had declined and ultimately brought GOLD with it after a bit of a lag. Lastly, stock started back up in early July which should have told us to look for a buy point in GOLD and sure enough a great one showed up a couple of weeks later.
This certainly also dispels the laughable story about GOLD being a safe haven for the coming economic wipeout the GOLD bugs call for. If we get a stock wipeout, GOLD will ultimately go with it as you can see here even if there might be a lag of a week or two. As I stated the other day, there is not really a historical precedent for this linkage. I have no idea how long it will last, but as long as it is as clear as this, we have to honor it. Do I trade GOLD based on what stocks are doing? No. However, I do take it into account if I am looking to short multiple markets at the same time as I have mentioned over and over in here.
It is possible that GOLD could become a flight to quality safe haven in a stock wipeout, but it is also possible I will shoot 59 the next time I play golf. I always want to base what I am doing on what has occured in the past, and therefore is likely to occur in the future. I do not want to base it on a theory of what could concievably happen for the first time. You will be out of shillings by the time your hail mary pass is completed if you repeatedly bet on longshots.
With all that being said there is something interesting to ponder here for the balance of the year. There are long term cycles in play that are bullish on GOLD and guess what, the same thing is true for STOCKS this fall. In as much as I have been bearish on stocks in the near term and still am, I cannot ignore what is coming in terms of cycles in a couple of months. Larry Williams has just released something that lays out why he is bullish on stocks this fall, and it does tie into when these cycles are due. I have no idea right now if I will go long at that time, but I certainly will be looking for some confirmations of these cycles. For now I am bearish on stocks and looking to short this bounce that is underway in another day or two.
Good Trading to Everyone