Gold and Stocks Going in the Same Direction

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Yesterday, gold closed at $1,200. Long-term Daily Reckoning sufferers can finally hold their heads up. We bought gold at the beginning of the bull market. New readers, with no gold buried in their back yards, may wonder: is it too late?

Here is a quick answer: no. We’re still a long way from gold’s ultimate destination. Our ‘Trade of the Decade’ was to buy gold on dips and sell stocks on rallies. The idea of that trade was that gold and stocks were going in opposite directions. Stocks were supposed to go down. Gold was supposed to go up. They would meet at some point, we imagined.

But lately they’ve been going in the same direction. Yesterday, for example, stocks rose with gold; the Dow added 126 points.

Which poses a bit of a dilemma. We think stocks are more likely to go down than up. Will gold go down too? Yes, probably.

Does that mean you shouldn’t buy gold here? No, not necessarily. If you’re trading, we’d suggest you wait. Gold is ready for a correction.

But it is usually a mistake to trade in an out during a major bull market. If the trade goes against you, you end up sitting by the sidelines as the market roars forward. You miss the best part.

Gold’s best part is still ahead. And this is not just a bull market; this is a fortune maker. Gold still hasn’t entered the bubble phase. It is just a very strong bull market. Eventually, it will soar…adding $100 in a single day. It will take our breath away. You want to be in it when that happens.

But is $1,200 the best price you can get to enter the gold market? Probably not. But it’s not a bad price. You can wait for a better one; but don’t wait too long.

John Hussman puts the odds of a major market crash sometime in the next 12 months at 80%. If stocks go, gold is likely to go down too. And it could stay down for a long time.

We keep our Crash Alert flag flying…and have a hunch the crash will come sooner rather than later. Day after day, the bubble gets bigger…and the pins get closer. Greece? Britain? The US?

Real estate? GDP? Bond sales? Christmas sales? So many pins…so little time.

One of the biggest pins is the record borrowing by governments. The longer it goes on…the bigger, sharper and closer the pin becomes.

Dubai was nothing…like getting stuck by a mosquito. It itches. It swells. But it does no lasting damage. It could be much worse. Now, the government of Dubai says that Dubai World is on its own. Good luck to the lenders.

Those Arabs are pretty smart. If the US feds had only done that with AIG, GM, Fannie Mae and other big debtors…the whole thing might have blown up and blown over …and now we’d be picking up the pieces and getting back to work.

Instead, the pols and central bankers trod in where angels and sensible investors feared to go at all. Now, they’re wondering how to tread out.

Germany announced that its deficit would not be as big as expected. Instead of 49 billion euros, it will be only 39 billion – below 3% of GDP this year. France says it’s bringing its deficits down too – to less than 3% of GDP by 2013.

The US and the UK, on the other hand, are out of control – with deficits over 12% of GDP and no credible plans for substantial reductions. As we reported last week, these deficits are largely structural – that is, they are the product of many years of mismanagement, not just this year’s crisis-respond claptrap. It’s hard to bring them down because they include public health, unemployment, social security and defense measures that are very difficult to stop.

Yes, stocks will react, eventually. Gold will come down with them. Then, at some point in the future, gold and stocks will de-couple…and gold will head to the moon.

Regards,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. here is the lifecycle of a bubble….

    http://www.housepricecrash.co.uk/graphs-bubble-lifecycle.php

    I know which phase I think gold is in.

    in my humble and most likely wrong opinion I reckon there is more chance of gold hitting $700 than $2500 or indeed that great undefined target of “the moon” that all gold bugs use so they cannot be measured.

    If I am wrong.. oh well no skin off my nose… if I am right… I will laugh and laugh and laugh….. Not because I am mean…. but because gold bugs deal only in certainties. They cannot even entertain that gold might not just make it to the moon….. something more than our current situation is required to give gold bugs wet dreams…. a big war at least.

    Reply
  2. Gold is far from a bubble. A bubble is when every man and his dog at the pub is buying something, like in 1999 with Nasdaq tech stocks which was nnot based on fundamentals. Very few people are buying gold outside of the insiders. Who do you know who is actually buying gold? Apart from myself, I do not know anyone. Further, not many apart from those in the know wil buy gold if the stockmarket keeps going up.

    However, the stockmarket is actually collapsing when priced in gold and as the US dollar collapses, the gains in the stockmarket have been offset by greater losses in purchasing powerdue to the losses in the US dollar. The dow is at 10,000 now but was at 10,000 10 years ago so it has effectively done nothing while gold has put on 400% in that time going from $300 to $1,200. Therefore, 10 years ago, the dow bought 33 ounces of gold while the dow is only buying 8 ounces of gold now.

    As the USA keep printing and devaluing the dollar, gold will strengthen and as the stimulus stops, the stockmarket will fall, there is no way to get around this and it is basic economics. The recent gold surge is not based on speculation but rather fundamentals. The US have printed trillions of dollars in their bailouts and war funding and the deficits are greater than ever. Why is the stockmarket in the USa going up if unemployment keeps rising and the dollar is falling? This makes no sense at all and smells of a suckers rally.

    For more information on gold, go to this you tube channel that has many interesting gold videos and explains the fundamentals.

    http://www.youtube.com/liveforever72

    Reply
  3. well, when gold was $900, i was pretty certain that it would hit $750 before it hit $1,000. as usual, i was wrong.

    anyway, i guess i’ll sit out 2010 and see if gold hits $2,000 before the next election cycle, because it might be worth taking some profits then…

    but, i wonder if with all the gold hoarding going on, what would happen if a significant amount got dumped on the market at once? gold prices have collapsed 75% before, which was either one hell of a balloon or some financial hanky panky….

    Reply
  4. baal at some point people who have been buying gold will sell unless of course they have some strange desire to never make any money and just have some gold stored in a vault somewhere forever. It looks a bit like the tulip bubble all over again to me as the main thing supporting gold prices now is the belief people have that it will keep rising in value. The amount of gold we actually need for industrial purposes & jewellery would not justify prices at current levels. (and jewellery demand is somewhat elastic anyway)

    The question is, what would trigger people to start selling gold? Signs the U.S economy was doing well? Or perhaps news that a major holder of gold was selling? I wish I knew :)

    Greg Atkinson
    December 7, 2009
    Reply
  5. The move to gold wont stop until governments provide better currency arrangements since unstable currency is the factor driving the price up.

    Lachlan Scanlan
    December 7, 2009
    Reply

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