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Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Friday, January 25, 2013

Rotation From Gold To Stocks

The gold price and the stock market reflect some key variables:
.... Fed policy in terms of both Fed Funds rate and monetary liquidity;
.... Leading economic indicators;
.... Trends of industrial production, sensitive materials prices and the oil price;
....  Broad measures of inflation.

Gold and stocks will often part company when investors fear severe systemic financial
problems ahead and / or when inflation is accelerating rapidly. Inflation has been a minor issue
in recent years, but fears of financial / economic armageddon have been hot button issues.

For years, smart equities players have gone long the gold market when systemic stress
anxieties have run up, and have moved back into stocks when such anxieties abate. That has
clearly been the case since the late summer of 2011 when worries about a possible collapse
of the Euro and disintegration of the EZ peaked. Since then, faster money equities players have
been rotating from gold back into stocks SPY Strength Relative To GLD

From a purely technical point of view, stocks are getting pricey relative to gold while the
SPY / GLD relative strength measure is coming up to resistance. So we are moving into an
interesting period when confidence in the potential for faster global growth in a mild and
systemically stable environment might be tested. If the idea of quiet economic progress holds
up, then the SPY / GLD ratio should easily surpass the 1.00 level this year. Keep an eye on it.


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