Brett Owens is a leading on income investing; the editor of the industry-leading Contrarian Outlook ...
Stock Up on Gold for Its Next Move
08/03/2010 12:00 pm EST
Curtis Hesler, editor of Professional Timing Service, says gold prices have paused before mounting their next move higher, while stocks may go lower again.
The June bounce we were anticipating has come and gone. From a short-term perspective, there is minor support in the [Standard & Poor’s 500 index] at 1,000, and we may well see the next bounce from that level.
Nevertheless, my work is pointing toward a low in December that will be followed by at least a tradable rally. For the time being, you should look for a choppy ride down to those late-year lows.
The secular bear market that we are witnessing has a way to go. Investors should not look for a new bull market to begin in stocks for several years. There will be the occasional bear market rally, and they can be quite impressive—as the March 2009-April 2010 rally was. However, there will not be any money made in equities for several years.
The most successful investors in financial assets will manage to stay even; but before the next bull cycle in the averages begins, I would not be surprised to see the S&P 500 drop below 700. Basically, the stock market is going to languish and disappoint until the [ratio between the Dow Jones Industrial Average and the price of an ounce of gold] falls below five.
This ratio measures the relative values of financial assets to tangible assets and would be better named the “gold timing model.” It should be at the core of every investor’s set of tools. The ratio is currently eight, and it’s falling, which indicates that gold is continuing to outperform the stock market.
Once the ratio falls below 5, a new bull market in financials will not immediately begin. I fully expect to see the ratio fall as low as 2 (or even 1), as it has at bear market lows in the past. However, once the ratio falls under 5, it will be time to begin planning [to shift] out of our tangible gold and energy investments and back into the popular averages.
Bullion put in a broad, rolling top in May and June. Another element—which is not as easy to measure—is sentiment. There were just too many bulls in the media, in the news, in magazine articles, in advertisements, and in my e-mails for me to be comfortable with the idea that gold was going to blast significantly higher without a correction first. That correction is now in progress.
There is some minor support at $1,200, but I expect that level to be broken and for bullion to continue somewhat lower. Bullion at $1,150-$1,180 is a safe bet. However, you do need to be prepared for the possibility of deeper prices in this correction.
This always seems to upset investors to an extreme degree. You need to focus on the long term and be patient. Gold will probably double from current levels, and it will easily hit my long-held target of $1,600. The key is to buy fear and sell comfort.
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