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Economic historians will
look back at this decade, as the decade of complacency.
Consider for a second, the definition of complacency
from Dictionary.com:
Complacency is…"A feeling of quiet
pleasure or security, often while unaware of some potential danger, defect,
or the like; self-satisfaction or smug satisfaction with an existing
situation, condition, etc."
In a nutshell, this clearly describes what has occurred
throughout this decade. Consumers have continued spending in the midst of
declining savings. Housing prices have escalated even as incomes and job
growth have failed to appreciate. Manufacturing has left the country,
inflation has soared, and our budget and trade deficits have increased at an
unbelievable rate. Yet in the midst of all of this the "goldilocks"
phrase has been tossed around, consumers have lived outside of their means,
and individuals have had a false sense of economic security.
What has transpired in the last several months
should serve as a wake-up call. The housing slowdown, sub-prime debacle, and
equity decline should not have taken anyone by surprise. Yet it did. The
escalating tensions with Iran
should not surprise anyone. Yet it has. Last night, oil prices jumped to
$68/barrel as rumors about an attack by Iran on a US vessel sent prices higher by
$5 in a short period of time. While this ended up being a rumor,
it is not a rumor that Iran took hostage 15 British
sailors. Oil prices should have jumped higher on that news alone. Yet it
didn't. This again shows you the complacency that is still in the market. Any
way you look at it, taking 15 British soldiers hostage is a big deal.
In any case, whether it is complacency over
geopolitical tensions ((not only with Iran,
but also with North Korea
and Venezuela) or
complacency about the US
economy and the housing market, investors should be aware that this lack of
regard will get them nowhere. At best, having this outlook in the midst of convincing
economic data and news is hopelessly optimistic. At worst, it may lead to
financial ruin.
Gold Breaks Away From Equities
About a week ago (March 16th) I emailed my
newsletter subscribers and stated that gold has been tracking the stock
market. You can view the whole article here. In the newsletter, I stated:
"As you can see, gold has pretty much tracked
the S&P in terms of its movement. When the market rallies, gold rallies.
When the market sells off, gold sells off. Even the bullish fundamental news
that has come out this week (higher than expected inflation) has failed to
push the price of gold above its range bound trading (640-660). So the
question becomes…is this a new trend? Or simply a short-term reaction
to what has happened in the market over the last couple of weeks. In other
words, will gold continue to track the market or will it finally decouple and
trade by its own merits?
This question is magnified by the fact that I
believe we are still in the infant stages of this stock market decline. If
the stock market continues its decline and gold continues its correlation to
the equities markets, I would expect the price of gold to break below the
range and drop to the 590 to low 600's level. On the other hand, if we see
gold decouple from the equities market, the upward movement in gold will be
sharp and quick.
As of now, investors in the gold market continue to
keep an eye on the stock market. Only time will tell when this short-term
trend will end. However, I do believe that the moment we see gold move
sharply upward (and above the 660 level) while the stock market has a sharp
decline, this will likely symbolize this decoupling. Fund buying will
likely come in around those levels and investors will once again realize that
gold is not only a value play, but an irreplaceable asset for their
portfolio. Until then, I am keeping a cautious watch on the gold market. Long-term
and intermediate-term fundamentals remain in place, but the short-term
correlation with the stock market is quite interesting."
This week we saw gold break through the 660 level
and also saw the market head sharply lower as gold has remained strong. Even
as I write this, gold is up about 5-6 dollars and the S&P is down about
12 points. [Update: gold is selling off and the stock market is rallying]. While
there will likely still be moments where gold will track equities, gold is
now clearly trading by its own merits. Oil is up, tensions with Iran are
escalating, and the recent sell-off and consolidation that occurred in the
gold market is setting up for a relatively quick move above the $700 level.
In addition to the fact that gold is decoupling from
the equities market, there are several other key reasons why I believe we
will see this quick move up to $700.
- Gold has
broken out of the 635-660 Range
- Middle-East tensions heating
up
- Sharp rise in oil prices
- Dollar weakness
continues
Emanuel Balarie
Senior Market Strategist
Wisdom Financial, Inc.
www.wisdomfinancialinc.com
I
will be discussing these issues in my free newsletter later this week. If you
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