MARKET REVIEW: What does the gold market know?
dailyreckoning.com
For five straight days last week, the NYSE traders matched up
millions of buyers and sellers, and processed hundreds of
billions of dollars worth of trades. And at the end of it all,
the Dow Jones Industrial Average closed out the week... drum
roll, please... nearly unchanged.
The Dow and S&P both fell a mere 0.3% over the past five trading
days, while the Nasdaq fell 0.2%. The Dow's modest lost snapped a
5-week winning streak. But bullish sentiment is still alive and
well.
Stocks are in vogue and investors can't seem to buy enough of
these things, no matter how richly priced they might be.
Curiously, most folks trust a rallying stock like children trust
a policeman. Unfortunately, a rallying stock is more likely to
commit petty larceny than to "protect and serve."
But as long as the stock market is rising, the lumpeninvestoriat
will trust that all is well and hope that all will soon be better
still. They will believe that economic conditions are improving
and that stocks will continue rising. We hope the lumps are
right... Indeed, we suspect that they're half-right; the economy
seems to be showing signs of recovery. But the lumps are also
half-wrong: an improving economy doesn't mean than an overvalued
stock market will become even more overpriced.
Maybe this realization is seeping into the subconscious of some
investors. Perhaps this latent anxiety about the stock market,
coupled with clear and present worries about the U.S. dollar, is
inspiring a few folks to buy gold. The yellow metal charged out
of the starting blocks early in the week with a dazzling $6.60
gain on Tuesday to $382.80 an ounce - the highest closing price
in seven years. But the precious metal tarnished a bit as the
week wore on, slipping to $374.80 at week's end.
Despite the fact that gold ended the week a few dollars farther
away from $400 an ounce than where it started, the price jump
into the rarefied air above $380 sent the gold bugs hearts
a-flutter. Gold bulls have little to complain about. The yellow
metal has jumped more than $30 over the last three months and
gold stocks have been on fire. The XAU Index of gold shares has
greatly outdistanced the S&P 500 year-to-date with a sparkling
gain of 20%.
"What does the gold market know?" we wondered aloud earlier this
week. "Does it know that the Fed's reflation campaign will
succeed too well? Or does it know that President Bush will
continue spending billions of taxpayer dollars to preserve Iraq
as a breeding ground for terrorists and a habitat for
anti-American terrorist acts?
"Or maybe the gold market knows only that U.S. financial assets
are very expensive, and worries, therefore, that U.S. stocks
selling for 35 times earnings, U.S. bonds yielding 4.40%, and a
U.S. dollar selling for $1.12 per euro are all too pricey for
risk-averse investors to own in large quantities.
"Gold has always provided a kind of insurance, first and
foremost. It is not an 'investment' per se. But when economic
uncertainties mount, buying a bit of gold 'insurance' can be a
terrific investment."
Stay tuned...
Regards,
Eric J. Fry
The Daily Reckoning |
