The Gold Economy

It’s hard to tell where the market and ETFs are headed these days. The bears are clamoring for safe havens in U.S. Treasuries and commodities, while the bulls are clinging onto any positive economic news they can lay their hands on. The S&P 500 is up almost 40% from March 2009, but year-to-date, it is down almost 10%.

That’s why investors have made gold one of the hottest things on the market right now.

According to Claus Vogt of Money and Markets, “Dubious monetary policy and irresponsible fiscal policy with government debt rising all over the world are a surefire recipe for a surging demand in gold.”

Vogt doesn’t like that he’s bullish on gold because it reflects lousy economic and political conditions. One indicator that Vogt focuses on is a leading indicator released by the Economic Research Institute. Last week, that indicator declined to minus 5.7%. Now, it’s down even more to minus 6.9%.

In addition, the bond markets are sending negative signals. Typically, inflationary fears hurt long-term government bonds since interest rates and prices move inversely to each other. In inflationary conditions, central banks will tend to raise interest rates. However, interest rates on long-term bonds have not yet risen. This seems to indicate that short to medium term buying pressure for safe haven investments is trumping long-term fears. That is not a good indicator for the stock market.

At the same time, gold and gold mining stock prices have been rising. Since gold is commonly viewed as a safe haven from inflation, this situation is a bit puzzling. Vogt thinks the odd situation may be for one of three reasons:

• The gold market is considering the short- to medium-term potential of a double dip recession.
• The gold market is already reacting to the longer-term inflationary implications of the above mentioned monetary and fiscal policies.
• The two markets — Treasury bonds and gold — are currently playing different time frames. And maybe this decoupling will continue.

Regardless, Vogt says the gold market is sending strong signals of a breakout. If you think the global economic recovery will sputter, you may want to heed Vogt’s advice.

• SPDR Gold Shares (GLD)
• iShares COMEX Gold Trust (IAU)
• ETF Securities Physical Swiss Gold Shares (SGOL)
• Market Vectors Gold Miners (GDX)
• Market Vectors Junior Gold Miners (GDXJ)
  

Sumin Kim contributed to this article.

Disclosure: None