Friday, October 30, 2009

Trick, not Treat for Stocks as the VIX Soars

The stock market is way down, the VIX has for now had at least a short-term bearish trend reversal, and gold continues its pattern of accumulation. Once again, it is going down less than stocks on down days, while rising about as much on up days for stocks. Furthermore, the weak rebound in the dollar today has affected the price of gold as follows, per Kitco:

Gold price down $7.40;

$2.10 of that decline was calculated to be due to intrinsic selling; the other $5.30 decline was directly due to their calculation of the amount the dollar declined against a basket of major foreign currencies.

In other words, the major stock indices are, as I write, down 2+% (intrinsic selling), but intrinsic selling in gold is only 0.2% of its price, and total percent price decline is about 0.7%.

Stocks are farther above their 200 day moving average than gold and are also percentagewise farther from their 12-month lows than gold; and are vastly farther above their year-to-date lows than gold.

In other words, the current message of the markets is that owners of gold are less motivated to sell than are owners of stock, as there is less selling pressure on down days; but when there is buying pressure on stocks, there is about as much buying urgency toward gold.

Gold can rise in nominal terms even if the economy is going down (think the past 2 years). Silver is much less likely to do so. If silver (or the more-difficult-t0-buy platinum) drops a lot and you believe that cyclical and other factors will make the real global economy grow, then silver will have more upside.

As an aside, one of my friends is a commodities trader who, let us say, retired young and lives and breathes markets so much that he keeps more than one TV on during the trading day in his house. He was bullish on silver from the first time we met about 7 years ago. Silver was then well under $5. He told me that his long-term chart analysis suggested an ultimate target of $100/ounce. Since then we have seen the first 5X move to over $20 with consolidation for many months. If we have a major pullback in silver without a major economic downturn, then investors/speculators interested in tangible assets may want to consider it, but only with pure risk capital.

Given my greater optimism for real global economic growth than for real rise in U. S. financial asset prices (stocks and bonds), my risk capital is increasingly oriented to real things than financial assets that I believe in my heart of hearts are at best fairly valued (think McDonald's).

Back to the VIX. Short-term, I believe it's too late to sell. Look for a snapback rally unless Citi goes under or something else fundamental makes the headlines.

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