The "Silent Rally" in Gold


". . .the odds favor equity price gains outdistancing commodity price gains this year."

It was a typical options expiration week with markets showing a lassitude that normally accompanies this event. The SPDR Gold Trust ETF (GLD) was up for the week to finish at 91.55. This is our main proxy for the gold price and we have a trading position in GLD after we got a buy signal back in April when GLD broke out above the dominant immediate-term 15-day moving average.

GLD is still above the 5-day and 15-day MAs as of Friday's close. The gain in GLD in recent days has been very gradual but steady and reflects the building of buying interest in gold as a "safe haven" as fears linger over the sustainability of the huge equity market gains since March. Institutional interest has seen gold and the gold ETFs turn into temporary vehicles to park gains from profitable equity trades during broad market corrections.

The consensus among financial pundits is that gold is a "sure shot" to take off from here and eventually reach $1,000/oz. based on the multi-trillion dollar stimulus package. It's a common assumption that the stimulus will inflate commodities and spark another round of global inflation for hard assets. I would caution that this is far from a foregone conclusion, however.

If anything, historical analysis show us that commodity price rhythms typically alternate between periods of inflation and deflation in stock and commodity prices with stocks getting most of the benefit following severe bear markets.

Although I'm sure we'll see some competition between stocks and commodities as this year progresses, much as we saw in the boom years from 2003-2007, the advantage currently resides with stocks and the odds favor equity price gains outdistancing commodity price gains this year.

Gold's latest rally is a microcosm of what I expect for 2009. The rally to date has been a "silent" one in that it hasn't been overly exciting or suggestive of major inflation. Many traders have slept on this one despite being fairly profitable for us so far. But it does denote recovery and also perhaps reflects lingering concerns over the stability of the financial system, a carryover from last year's severe bear market.

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