13/11/2009 – If Stocks Tank, Shouldn’t Gold Soar?

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).

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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.