Gold had been moving mostly sideways for more than five weeks as the market digested the large pullback at the end of the summer. As we discussed in several of our previous market updates, we’ve been waiting for a pattern shift to occur which could set the stage for the next significant upswing in gold prices. That shift has occurred in a big way.
Since late August, gold has shown the highest price correlation to securities markets we have seen since 2008. More specifically, gold has moved up and down with global stocks instead of opposite them. The main reason for this is that the crisis in Europe has pushed global stocks down. At the same time however, it has driven the value of the Euro down, which has in turn made the dollar look stronger. The stronger dollar has put downward pressure on gold prices, making them move in the same direction as equities markets.
High price correlation between gold and equities is not necessarily good for gold prices, especially when the dollar is flying high. It gives investors no incentive to diversify into gold when it is moving in the same direction as stocks. Yesterday however, the pattern changed.
The DOW closed on Tuesday afternoon more than 200 points down, while gold sailed skyward past major technical resistance at $1705. As the DOW sank by more than 1.5%, gold added over 2.5%. This means that these two markets, which have been essentially attached at the hip for six weeks, posted a massive 4% differential yesterday. This is incredibly significant for gold prices.
From a short term technical standpoint, gold has broken out of its trading range after establishing extremely strong consolidated support. This is very bullish for mid-term prices and will invite speculative money back into the market, allowing for much larger upside moves, not dissimilar to what we saw over the summer. From a longer term perspective, this divergence between gold and stocks has brought back two of gold’s key attributes: diversification and protection. With the EU crisis worsening by the day, investors may soon be scrambling for any safe asset they can find.
If gold continues to break its correlation to stocks, it will invite much of that money into the market. No one else is really talking about this yet, but I believe it could set the stage for very impressive upside moves, very soon.
Mike Getlin is Executive Vice President of Merit Financial, home to America's fastest growing physical gold IRA company. Please send comments or questions to firstname.lastname@example.org.