Thursday, December 22, 2011

What's Going On With Gold?

There is a striking similarities between today's situation and what happened back in 2008. 

Specifically, we're referring to the liquidity crunch that jolted the financial markets in the period that led up to the collapse of Lehman Brothers.

At that time gold was one of the last remaining sources of liquidity - and so it is today, which is why the yellow metal has been under such intense selling pressure lately. And this is happening even though all the fundamentals would suggest it should at least be retaining its value, if not be rising in price.

Gold was an important bellwether at that time, and again, so it seems to be now. Beginning in March of 2008, gold declined by about 15 percent while the S&P 500 moved sideways. Then it rallied briefly before falling once more along with stocks - which declined much more percentage-wise before bottoming.

Gold lost a third of its value during this episode, before recovering and heading steadily higher. But stocks declined by more than 50 percent at their lows, and to date have yet to surpass former highs.

Coming back to today, we see that despite the ups and downs of this past very volatile year, stocks have essentially traded sideways. Gold, though, has now fallen more than 15 percent from its previous highs and, as we pointed out two weeks ago, the gold shares far underperform the Midas metal.

Thus, we see how this price action may once again be signaling a sharp selloff in stocks in the near future. At the very least, gold and stocks could remain mired in a trading range for a time, at least until the ECB (most likely joined by our own Federal Reserve) take concrete steps to resolve the situation.

The shape of such a favorable resolution is likely to be a clear and definitive policy of easing by the Europeans, possibly accompanied by a QE3 from our own Fed.

That would help to light a fire under the stock market, which by and larger are trading at very reasonable levels relative to sales, cash flow and earnings. Moreover, the prospects for gold will then involve a rebound that should take the metal far higher than its 2011 highs.

Courtesy: Stephen Leebs

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