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Are Gold & U.S. Stocks About To Move in Opposite Directions?

August 18th, 2011 · Chris Vermeulen · 16 Comments

The past few weeks traders and investors have been completely spooked from the surge of negative news and collapsing stock prices. This fear can be seen by looking at the volume on the GLD gold ETF fund. With gold being in the spot light for several years now and the fact that anyone can own gold simply through buying some GLD shares. It only makes sense that reading the volume on this chart gives us a good feel for what the masses are feeling emotionally.

If we step back to trading basics we know that fear is the strongest force in the financial market for moving prices. And that there are a few ways to read fear in the market and the more which line up at the same time means there is a higher probability of trend reversal in the near future.

The first thing I look for is a rising volatility index (VIX). This index rises when investors become fearful of stock prices falling be hedging positions or flat out buying put options to profit from a falling market.

Second, I look for a high selling volume ratio meaning at least 3:1 shares traded are from individuals hitting the sell button in a panic thinking that the market is about to collapse.

And last but not least… I look at the GLD gold etf volume and price action. A surge in GLD volume after a strong move up means everyone is scared and dumping their money into a safe haven.

Let’s take a look at some charts to get a better feel.

GLD Weekly Gold Chart:
As you can see there are sizable price movements which ended with strong volume surges. Those volume surges mean that the majority of investors have reached the same emotional level and bought gold for safety (GLD ETF). Keep in mind that the big money players and market makers can see this taking place and that is when they start selling into that surge of buying volume locking in maximum gains before there are no more buyers left to hold the price up. Tops generally take a few weeks to form so don’t expect a one day collapse.

The recent rally in gold has taken place when stocks have fallen sharply. Money has been pulled out of stocks and pushing into gold but I think that is about to change…

SPY Weekly SPX Chart:
The past month has been a blood bath for stocks. But from looking at the charts, volume and the fear in the market I can’t help but think we are going to see higher stock prices as investors see stocks moving higher, they will pull money out of gold and dump it back into stocks and likely high dividend paying stocks…

Mid-Week Trading Conclusion:
In short, everyone piled into gold sending it rocketing higher and I feel it has moved to far – to fast and is ready for a pullback (pause lasting 2-12 weeks). In association with gold’s pullback I feel investors are now realizing they sold their stocks at the bottom of this correction because fear took hold of their investing decisions. Now they are starting to think about getting long stocks but it still may be a bumpy ride for a few weeks yet…

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16 responses so far ↓

  • 1 Mr Editor // Aug 18, 2011 at 4:15 pm

    I noticed your positive beliefs on how the market will perform. To add to the discussion, I thought I’d share this article which compares the US to Japan.

    http://www.ritholtz.com/blog/2011/08/turning-japanese-spx-vs-nikkei-index-10-year-lag-2/

  • 2 Greg Atkinson // Aug 19, 2011 at 8:53 am

    Well overnight the movement was certainly gold up, stocks down.

    The chart of the U.S versus Japan stock markets is interesting. I wonder what the chances of a double dip recession in the U.S. are now?

  • 3 Jimbo Jones // Aug 19, 2011 at 12:49 pm

    Be careful when comparing Japan to the US.

    Japan has deflation. The US has inflation. Most importantly, the USD is the reserve currency. It means it can make inflation on its own.

    The Japanese Yen does not have that factor.

    Anyway, good luck with your graphs.

  • 4 Greg Atkinson // Aug 19, 2011 at 2:29 pm

    Yes Jimbo I agree, we do need to be careful when comparing charts. Give most charts a good tweak and use a favourable time-frame and you can get a lot of things looking similar when they are in fact not much the same at all.

  • 5 Stillgotshoeson // Aug 19, 2011 at 3:10 pm

    “Are Gold & U.S. Stocks About To Move in Opposite Directions?”

    I think it was always a given that they would, the when has been the question, not the if.

    QEIII is looking a certainty now.. maybe September Quarter.

    One last false rally for the DOW and the expected retreat of the Gold price before it all falls over… who knows… that’s the way I am playing it.

    Can not remember whom stated it but they said that they expect the DOW and the USD Gold price to be the same soon.. Is that 10K Gold and 10K DOW or 5k Gold and 5k DOW, buggered if I know but I would not dismiss the possibility in the current economic climate.

    I have long believed the US would/will double dip… not that ever really got out of the first one bar some dodgy accounting and fudging of figures.

    My target price for Gold has been $2400USD and sub 5000 for the DOW.. I am more and more thinking these figures are optimistic.

    I am where I want to be as far as stocks and cash positions go.
    Ready to take advantage of the drop when it comes, may be a long period before it returns/exceeds previous highs but I am 43, not 63… I think time is on my side for this ride.

  • 6 Lachlan // Aug 19, 2011 at 6:45 pm

    Interesting to note on the gold chart how a price volume divergence appeared over the period of the first three highs shown (price higher , volumes lower) which could have given sellers/shorts some hope on a top in gold, alas no such thing happened. Price continued higher and volumes went up also much higher than the previous year to once again correlate positively with price . Besides charts/study of price action, it is still important to have a fundamental case for the longer term…in this case the ongoing debt dependency of the world economy with no end in sight is a good start. With this in mind one could have talked themselves out of taking the sell side as the negative correlation matured quite some months back. (I am not implying the writer of the article above did that)

  • 7 Greg Atkinson // Aug 20, 2011 at 9:20 am

    I am sure I will regret what I am going to write but for me the gold price at these levels is in bubble territory. Demand for gold has not increased over the last 12 months enough to justify current prices so it’s fairly clear to me that gold is trading at a fear premium.

    That fear premium is of course real and in is being paid for in hard cash but it’s not a tangible asset…it will quickly evaporate into thin air once the mood of the markets changes and then what gold investors will be left with is an ounce of gold the value of which I would suggest will be much lower than it is now.

    For now gold is defying gravity..but for how long?

  • 8 Jimbo Jones // Aug 20, 2011 at 10:21 am

    Thought i would add a few more insights:
    – the recent sell off (i.e past 2 days) is still showing all the hallmarks of a nasty (but typical) correction forming a base. Chris graphs above in article shows a base type development that could infact be the case!
    – Gold is overbought currently in the context of this bull – Unless we are changing course to the parabolic stage, but probabilities favour either a quick sharp gold correction or a grinding correction over many months.
    – ASX 200: We did have a sharp 15% – (Yes 15%) bounce from that sharp sell off 2 weeks ago. not bad during all the gloom!
    – Fear Index is still sitting in buying territory. Expect this to continue to edge down the next month or so, as fear unwinds.
    – What about Credit Markets: They are litterallty pricing in Great Depression 2 in equities (or 3) if you want to count the GFC low where bears were calling for another 50% to be wiped out of the market at the same time the market in fact bgan a rally of 90% or so in US and 60% in AUD terms. Its a very difficult point – because with yields at all time lows in the US, finance 101 would suggest yields should be moving up fast. As the PIMCO team in fact suggest – yields can stay extremely low artifically held down through printing money. But how does debts disappear? Inflation and currency devaluation. Inflate the debts away through money printing and reduce foreign debtors holdings through currency haircuts. With zero rates till 2013, paying depositors near zero and investing in gov bonds paying 2% is effectively risk free.
    If growth expectations start being above mkt, which probably wount be hard to do, then expect a sig jump in yields
    So where to for the USD? I would love to say that i could answer this definitely – but like all markets being wrong is part of the game. But here goes, I would say that the USD should have already commenced a strong rally thruogh the recent equity sell off. But it hardly moved. It was Gold that performed the USD rallies job. Now should equities rebound over the next few months from this correction, i would suspect the USD is going to be sold off again especially against the commodity currencies. So that may mean the rebound in equties in AUD will not be as strong, consistent with a slowly moving equity rally over the next 6-9 months.

    At the end of the day, our bears are having a field day waiting for the next GFC i.e Lehmanns type crash. Where were they in July/August 2008 informing the market of a true financial panic coming. The answer is they were NOT there calling the financial panic. They were infact saying the market had completed its bear market. As it stand right now, everyone is looking for the next “big” crash. They will find the market does what it does best and prove the majority wrong at a time when all believe it to be correct.

    good luck. and have fund trading.

  • 9 Mr Editor // Aug 20, 2011 at 12:22 pm

    Greg, I also believe that gold is something of a bubble. Nothing drives it but fear, which is very difficult to forecast and to quantify (as much as people believe in the VIX, otherwise known as “the fear index”). That’s why I don’t believe in gold as a stable investment.

  • 10 Lachlan // Sep 7, 2011 at 7:53 am

    The Swiss Franc is now pegged to the Euro. There is no safe haven there so much more money will be saved through gold.

    Mr Ed buying gold for insurance/protection from currency debasement amongst other things is based on rational fear/caution like not crossing a busy road without looking. We will see terrific inflation more so than now. Either that or the global debt pyramid will collapse.

  • 11 Biker // Sep 7, 2011 at 8:15 am

    It’s hard to see that inflation actually _happening_ in the US, Lachlan. After several weeks in Alaska, including a week aboard a cruise ship, we were very impressed with prices of all commodities, including food, accommodation, alcohol and petrol. Cruise ship tickets were half-price… and nothing we saw in a dozen cities and towns (including tourist towns) gave us any impression of inflated prices. Even high-quality jeans and trousers are at least 40% off Australian prices. Sporting goods are outrageously cheap.

    We’re about to fly south to Las Vegas… then drive through four American states. Pre-paid accommodation and hire car costs are incredibly reasonable. It will be interesting to see whether inflation in the Lower-48 is an issue. We don’t expect it to be.

    Found an interesting analysis of dividend returns across the Northern Hemisphere, Greg. Best returns appear to be around 4.4% in Germany. It’s almost half that in other western countries.
    Of course tax implications must vary from nation-to-nation…

  • 12 Greg Atkinson // Sep 7, 2011 at 9:34 am

    My very simple view of gold is that it is trading at a high price due to a fear premium which means the price is artificially high. It could go higher of course, much higher, but the chances of me spotting a gold price peak are about zero so I am staying away from buying into either physical gold or gold ETF’s.

  • 13 Lachlan // Sep 7, 2011 at 12:58 pm

    Good to hear your enjoying yourself out there BP.
    Distinguishing monetary inflation from price inflation we have seen lots of the former and not so much the latter. Dissolving balance sheets have absorbed a lot ..etc
    The latter will come one day. Its the greater threat I feel in my own bones. So I don’t even….count… on property correcting harshly in ..dollar.. terms despite some weakness at present.
    Human nature, the political will to inflate…even the articulate Keen has come undone on that one. Its of most importance according to my view.

  • 14 Biker // Sep 8, 2011 at 7:51 am

    Yes, there’s a view among at least one school of economists that inflation… and budget deficits… aren’t a bad thing, Lachlan. I have to admit that inflation has served our family well over the years, reducing debt levels by around 40% each decade. One might argue we’re not better off, as a result, but our balance sheet makes that proposition quite laughable.

    Gold prices aren’t just rising due to fear, as Greg appears to suggest. Take (recent?) Chinese interest in gold. Economic advantage (I initially typed ‘greed’) is also a factor.
    But I also think the Chinese are hedging their bets…
    diversifying, taking out insurance… .
    The latter _might_ reflect fear.

    I’ve never been anti-gold, despite my disbelief that actual returns would reach the astronomical heights a few have claimed. We have, however, seen astronomical falls in precious metals over the decades, as opposed to mere plateaus in property values.

    Our eldest bailed on gold at around _half_ today’s value.
    He wasn’t greedy. Set and achieved his target… and got out.
    He also bailed on the ASX before the recent major falls.
    No idea how his international indexed funds are doing, but, like Greg, he’s reasonably happy with dividends, he tells us…

  • 15 Greg Atkinson // Sep 8, 2011 at 8:38 am

    Biker I have said gold prices have risen based on fear alone as such. What I have been saying is that gold is trading at a premium because of fear.

    For the record I have discussed gold supply and demand fundamentals some time ago in: Investing in gold: a basic guide for investors.

    Let’s see how well gold prices hold up if/when investor fear falls..that should give us an idea of what the fear premium is/was.

  • 16 Biker // Sep 9, 2011 at 1:57 am

    Yes, we agree that much of gold’s attraction is based on fear. To what extent is the question… .

    “Let’s see how well gold prices hold up if/when investor fear falls..that should give us an idea of what the fear premium is/was…”

    Well, I think we might also have to factor in the appeal of other better-performing investments, as opposed to gold, too, Greg… . Many investors simply (and often belatedly) follow the money…

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