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Can Gold, US Treasuries, Oil and Stocks Continue Rising Together? September 2009
If you have watched various assets lately, you have noticed that they all have one thing in common: they have all been going up.
Stocks and oil have been moving higher since mid March, but gold and U.S. Treasuries have recently joined the party.
Students of the financial markets know this isn’t normal, and also know that eventually the positive correlation amongst some of these assets will revert back to being non- (or even negatively) correlated.
But why is it occurring?
To keep it simple, I will break down my answer in terms of each of the various assets.
Gold
More often than not, gold is typically a “fear-based” investment. Investors fear stock market weakness or inflation, and buy gold. Currently, I would suggest that some investors are trying to prepare for inflation, as well as being skeptical about the S&P 500 sustaining itself above 1000 right now.
However, there is another story at work: China. China has decided that they don’t care to fund our debt any longer and are concerned about our weakening currency. So instead of buying new US debt, they are investing some of their reserves in gold which could also explain much of the current correlation.
US Treasuries
Typically when investors purchase U.S. Treasuries (pushing their yields down), they are selling stocks or other assets deemed to be risky. Given the fact that our government is issuing debt at a rapid pace, and that yields are remaining very low, it can be assumed that there is significant demand for these bonds, implying a modest level of uncertainty. In other words, bond investors don’t smell a sustained US recovery.
One other potential explanation to the strong purchase for US Treasuries is that Americans are saving again, and those deposits in savings accounts and money market accounts are often used to purchase U.S. debt.
So for now, China is backing away from buying new US debt and even selling current US debt at a very slow pace (buying gold), but the slack is being absorbed by American savers and other investors betting against a sustained US recovery.
Oil
Three words: a weaker dollar. Oil is priced in US dollars and has a natural tendency to move opposite the greenback. Current demand does not support $75 oil, and each time $75+/- has been approached over the recent few months oil has backed away to the $68-$70 level. Best guess is that oil remains in the $62-$75 range for the foreseeable future, but if the dollar continues to burn and speculators jump in, watch out for $80-$90 oil. Stock market and economic optimists don’t want to see this as it would result in another significant headwind for the struggling U.S. consumer.
Stocks
There are a number of reasons stocks rise including optimism, institutional traders making moves based on technical analysis, and yes, the weaker dollar. Anything priced in dollar denominated currency has been going up. Go back and look at the relationship between the US Dollar Index and stocks since Sept. 1 2008---inversely correlated (dollar down, stocks up, and vice-versa).
At some point in the not too distant future something has to give, but exactly what and when is up for grabs. Intermediate term range for the SP 500 is 850-1250 (currently at 1035). As I have stated before, the financial markets can stay overbought or oversold longer than I can stay solvent.
Conclusion
My encouragement to you is to avoid complacency. Don’t try to time the market, but do think outside the box, be disciplined, and be flexible enough to change your approach if the circumstances warrant the change.
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