Gold and the Stock Market; It’s Not the Best of Both Worlds

I was sent this article, which uses TA as a basis to debunk those who think the stock market must crash for gold to be bullish. I thought I’d comment publicly since it is such a divisive subject.

SPX and Gold Combo Chart: The Best of Both Worlds

There is a misconception out there that in order for gold to have a bull market the stock markets have to crash and burn. Gold investor literally pray for the stock markets to crash so they can get their bull market in the PM complex. Once an idea like that gets embedded into the minds of gold investors it becomes hard for them to see the truth. A simple combo chart can show you the truth about why the stock markets don’t have to crash in order for gold to enjoy a bull market.

Well, since I am probably fairly prominent out there in the interpipes with a view pitting Amigo #1 (Stocks vs. Gold) as a key consideration to turning the macro, I’ll assume that Rambus, the writer of the above either has me in mind or other people with various counter-cyclical, anti-risk ‘on’ views about gold.

First let’s bullet point a few things pertaining to the quoted material above. I don’t mean for it to sound like I am personalizing this, but since I speak from my own perspective that’s how it may sound.

  • I don’t know who is talking about a crash, but in my preferred scenario for the gold sector gold most certainly must out perform the stock market (along with oil, materials, etc.).
  • I don’t really pray about things, let alone worshiping a yellow rock and its bullish potential. I mean, I reflect about things; I care about things. But pray? In the market realm? I don’t even know if the worst gold bugs “literally pray” for a stock crash so they can get their bull. Well, maybe the real lunatics, but not those with half a functioning brain.
  • Again, many gold bugs may be dogmatic, idealistic and some are even extreme. But please, painting “gold investors” with this brush is a little cartoon-like. They don’t “see the truth”? What is that truth? That a chart of SPX on top of a chart of gold sometimes correlates?

As for further response, where to begin? The man draws pretty charts. They are uncluttered and seek to tell the technical truth of what has happened in the past. In that regard they’re better than what the geeks who obsess on patterns and their forward implications put out there (ref. the “drop dead gorgeous bull wedge” on GDX just before a big drop in its bear market a few years ago) as they try to manipulate peoples’ emotions. But charts only tell you one thing; what has been, and the truth is that there have of course been times when gold and the stock market have gone up together. Gold and the US dollar too.

So what? We are talking about distinctions between macro phases and an SPX/Gold combo chart is not helping there. For instance, is the backdrop inflationary, deflationary or Goldilocks? What are the global crosscurrents? What are interest rates doing, both nominally and in relation? What is the Yield Curve’s status? There are just so many macro considerations that will answer why gold on occasion goes with the stock market and why it so often does not. Let’s just use the Yield Curve example.

Sure, there are times when they go up together, most notably from 2003 to 2007. That was when gold benefited as the Yield Curve declined, seemingly unconcerned about inflation as long-term yields stayed low in relation to short-term yields. You will also recall that Gold/SPX, Gold/Dow, etc. were strong. But this also built in the distortions that eventually caused the gold sector to crash as we noted poor fundamentals from about 2005 into 2008 as it sailed upward with the Greenspan-instigated ‘inflation trade’.

The theme of Rambus’ article seems to be have your cake and eat it too. I agree that the stock market does not need to crash and indeed am not even expecting that. But “the best of both worlds” (BOBW, I can sense a new buzz phrase is being born) is highly unlikely.

…this combo chart [see author’s article linked above for chart] suggests that we don’t have to see the stock markets crash in order for gold to have a bull market. Maybe we’ll see the best of both worlds which would be good for everyone.

I don’t want to be dismissive of someone who is earnestly providing (which I think he is) work for others’ consideration, but it’s (BOBW) not gonna happen because macro elements are always in play that call for discretion between assets, markets and most of all macro phases and conditions.

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