Gold and Stocks Joust for Leadership

04/12/2010 10:59 am EST

Focus: MARKETS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Insiders Plus, says a short-term fascination with stocks is probably a fantasy, but it could still be worth riding for a few months.

It looks like the trend [in unemployment] is becoming more clearly lower, albeit not yet at a scintillating pace.

The [recent] US government jobs report said the economy created 162,000 jobs, only 48,000 of which were temporary census jobs. [Separately], Trimtabs says … the economy added 280,000 last month, but most of them were government jobs.  

If we go look at the fact that the government itself says it only added 48,000 census jobs, then you have to assume that if Trimtabs is right, governments must be doing an awful lot of hiring of some other type of worker. I don’t think we’re lucky enough for it to be replacement Congressmen; so maybe it is states and cities hiring with federal aid that has finally made it through the pipeline. I can’t think of any other reasonable explanation, except that none of the numbers is reliable.  

I’ve been saying for a long time that any rallies in the stock market are due more to a weaker dollar than a stronger economy. We’ve looked at many charts on the subject that clearly demonstrate the relationship. The inverse relationship between gold and the dollar is even stronger.

Throughout most of the year (and most of the last ten, as well) [this relationship is] practically a mirror image, with gold rising as the dollar falls and vice versa. The dollar has been in an up trend since December, at gold’s expense. The Standard & Poor’s 500 generally follows the same inverse relationship to the dollar, but not as closely, and it is decoupling lately. Stocks are rising while the dollar is rising.

This recent action indicates that the market expects a kind of Goldilocks scenario, where the economy gets strong enough to boost profits, but not so strong that the [Federal Reserve] has to raise rates to prevent inflation.

In the short term, the market is always right, simply because what the majority believes it promulgates by its actions. How far from economic fact those beliefs stray will eventually tell the tale of how it all comes out.

For now, I still believe that the market is fairly stable. The problems we face are still beyond the very short horizon that Wall Street encourages us to watch. Until we come over the hill and see them staring at us like a brick wall, the problems will probably be ignored, just as the housing bubble was ignored until it blew up in our faces.

I’ll watch this trend another week or two, [and] if it still looks like it has legs, we may put back our short-term trading positions in gold and even add an index fund or ETF from the broad market, just to increase our exposure for a few months. I suspect this could last into early summer.

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