A Test of the Market’s Metal…

Certainly lots going on today, with more pubic spatting by the titans over Herbalife, the G-20 meetings, improved sentiment numbers, crude falling sharply and the INDU and SPX continuing to coil just below record levels…seemingly looking for a catalyst that will get them over the hump…or that will break the back of the bulls.

Oh yeah…and Gold breaking down in rather nasty fashion to test the 1,600 level – actually breaking through the key mark early on in the cash session. No doubt the shine has come off the precious metal…at least for now.

Given what’s going on with Gold, many are questioning what an upside or downside break would portend for equities and the overall market? That’s a huge question and lots of smart peeps are lining up on the different sides of the argument. Three of the more prominent positions put forth regarding upside or downside movement on the part of the precious metal go like this:

  • GLD led the markets up in the wake of the financial meltdown and will lead them back down given we are looking at a less accommodative monetary environment.
  • Once Fed bankers the world over stop their coordinated policy of easing, we will necessarily be looking at some serious inflation…which would give rise to the demand for Gold as a hedge against such inflation. Much debate now as to whether equities would suffer or hold their own in an inflationary environment, although there is general agreement and empirical evidence that the higher the rate of inflation (certainly sustained above 5 to 6 percent) the increased likelihood equities would fall out of favor.
  • The issue of currency engineering/currency wars on the part of major governments the world over has served to crystallize focus on a key problem the entire world faces (as has the calamity that’s played out the past several years in Europe) – namely, that of the “greenback” being the only fiat capital form capable of handling the role of reserve currency. While that’s good for the U.S. in terms of allowing for a lot of monetary sinning on our part, it ain’t so good for everyone else. As such, there remains a big-time need for an alternative. Many continue to put forth the argument that Gold is that alternative and will remain so, especially given the near-demise of the Euro and the fact that China is nowhere near a true policy change that would allow their currency to float freely as needed.

Believe me, that’s just three scenarios amongst many. And none can provide any level of certainty in terms of how equities would react given an upside or downside-break in the price of Gold. What does seem clear is that we are nearing a break from a pattern of consolidation that has existed now for some time. Yes, that coiling energy I often like to mention – the kind of energy that eventually sends things decidedly in one direction or the other.

Now I’m not about to guess what’s gonna happen or what that may or may not mean for equities – to me that’s a separate issue altogether. That said, I sense a real opportunity in Gold now, as I absolutely believe there is quite a bit of room in either direction (more so downside) and some clear levels to play off of in terms of staging directional positions with prudent stops. In my experience, such situations can offer huge reward to those looking for them…

We shall see…

~LH