If Stocks Tank, Shouldn't Gold Soar?
by Jeff Reckseit, Editor, Elliott Wave International | November 30, 2009
The following article is provided courtesy of Elliott Wave International (EWI). For more insights that challenge conventional financial wisdom, download EWI’s free 118-page Independent Investor eBook.
Large banks and more recently pension funds have suddenly become infatuated with gold. They chant the mantras that gold bugs have known for years: gold is a store of value; owning gold is financial insurance; an ounce of gold will always buy a good suit. The idea is that if the economy continues to weaken and share prices decline, a strategic allocation of the precious metal will hedge and offset some of the losses in the financial sector.
On the surface it seems to make sense and it’s hard to argue with the logic. Even so, logic can sometimes get twisted, whereas facts cannot. The evidence is found in the chart we describe as “All the Same Market.” Gold, stocks, currencies (versus the dollar), oil, grains, meats, softs, all decline in a deflationary environment. As liquidity dries up and credit contracts, people, businesses, and institutions sell everything to get dollars. Cash is once again king. This is bearish for gold.
Looked at another way: as the dollar advances from its lows, things denominated in dollars lose value against the dollar. As long as the dollar remains the global senior currency, assets will depreciate: not just stocks and commodities but residential and commercial property, works of art, collectible cars, pretty much everything. Of course, this outlook presumes a deflationary environment and that’s been our view for quite some time. But that’s another conversation. The topic here is stocks down/gold up - or not.
The long-time editor of the Elliott Wave Financial Forecast Short Term Update, Steven Hochberg summed it up succinctly in a recent issue:
“The other important aspect to a dollar bottom is the implication to all the other markets that have been moving opposite to this senior currency. The start of a major dollar rally should roughly coincide with a turn down in stocks, commodities, oil and the precious metals. So there are likely to be important trend reversals across nearly all major markets.”
Don’t fall into the trap of group-think. If investing was that easy we’d all have (insert your own private fantasy).
For more information, download Robert Prechter’s free Independent Investor eBook. The 118-page resource teaches investors to think independently by challenging conventional financial market assumptions.
© 2009 Elliott Wave International, Inc.
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Bio: Robert Prechter has written 13 books on finance, beginning with Elliott Wave Principle in 1978, which predicted a 1920s-style stock market boom. His 2002 title, Conquer the Crash, predicted the current crisis. Prechter’s latest interest is a new approach to social science, which he outlined in Socionomics—the Science of History and Social Prediction published in 2003. In July 2007, The Journal of Behavioral Finance published “The Financial/Economic Dichotomy: A Socionomic Perspective,” a paper by Prechter and his colleague, Dr. Wayne Parker. Prechter has made presentations on his socionomic theory to the London School of Economics, Georgia Tech, MIT, SUNY and academic conferences.
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