Gold’s Hidden Clue on the State of the Market
“Gold has got a negative correlation to bonds, it has got almost no correlation to equities…” – Ronald Stoeferle, Erste Group Bank, AG
Mr. Stoeferle is betting on gold to hit USD$2,300 per troy ounce.
We agree. Keep buying gold.
Today it’s USD$1,526 and AUD$1,428 per ounce.
His point on gold having no correlation to equities is important. As the following chart shows:
Source: Google Finance
The blue line is the U.S. S&P 500. The red line is the U.S. SPDR Gold Trust [NYSE: GLD], a gold exchange-traded fund which tracks the price of gold.
Sometimes gold goes up and stocks go up. Sometimes both fall. And other times one goes up… and the other goes down.
We’ve seen that play out in the past week of U.S. trading. Stocks have gone up, whereas gold fell then climbed.
As we see it, the importance of gold is it’s a better indicator of trouble than the stock market.
China’s bad loans to get worse
Even on bad news days stocks can still go up – we’ve seen that happen plenty of times recently.
Especially on low volumes, where most sellers have already gotten out, and all that’s left are the funds and those who foolishly believe markets always go up.
But while gold can get beaten up, it usually doesn’t take long for the fundamentals to show through. We’ve seen that happen this week too. Gold is up USD$50 in just a couple of days.
And that tells you to keep your crash alert turned up… and your exit plan ready.
Yesterday China increased interest rates by 0.25%. No big deal you may think. It’s only a small increase.
But think back to yesterday’s Money Morning and the news that Chinese banks could have over $100 billion of bad loans on the books… a number that could get worse with higher interest rates.
Bloomberg today reports:
“The ruling Communist Party may delay further increases because of signs of weakness in manufacturing and export demand and to avoid attracting more speculative capital to the fastest-growing major economy.”
There you have it. The “ruling Communist Party” is trying to micro-manage the Chinese economy to prevent a crash.
You know our opinion on that. It will fail.
An economy built on debt needs more debt to keep it growing. And it doesn’t matter where the debt comes from.
Trouble is, the debt just isn’t flowing fast enough. The drop in export demand tells you foreigners aren’t buying. They’ve hit the ceiling when it comes to debt.
The U.S. and Europeans are too busy figuring out what to do with the debt they’ve already lumbered themselves with.
More reasons for gold
And with official inflation above 5%, the Communist Party has increased rates to slow down borrowing. If those businesses have borrowed up big banking on higher foreign and domestic growth, they could be in trouble.
That spells bad news for those firms… bad news for Chinese banks… and bad news for the Aussie economy, which more than ever relies on China buying resources.
Add in the continued debt problems in Europe, and it gives another reason to hold gold for insurance.
As we’ve said all along, we can’t guarantee you’ll make a million buying gold. And we can’t even guarantee the gold price will initially go the right way when the proverbial hits the fan.
But there’s something we are sure about. And that’s the fact gold provides a great option as a long-term insurance policy against government and central bank meddling.
It always has, and as far as we’re concerned, it always will.
Cheers.
by Kris Sayce