According to mainstream financial wisdom, when the plane of the U.S. economy runs out of fuel in mid-air and starts hurtling toward the earth’s surface, investors do have one parachute of safety: Precious Metals.
Alas, things aren’t so hunky dory. Over the past year, passengers aboard Flight Wall Street have repeatedly hit the “Eject” button -- only to find that gold's parachute fails to open.
Take, for instance, the just-experienced “Carnage” of Thursday, September 4. On that day, the U.S. stock market suffered a complete system breakdown: the Dow Jones Industrial Average plunged 344.65 points into fresh bear market territory.
If ever there was an event to release the precious metal parachute, this across-the-Big-Board plummet SHOULD have done so. Yet -- at the day’s end, gold followed stocks down, below the psychologically important $800 per ounce level.
I have two-and-a-half words for you: “What Safe-Haven?” Over the last year, every major engine of the U.S. economy -- from real estate to retail, employment to energy, and credit to commodities -- has malfunctioned. Yet, gold prices are down more than 20% alongside a 15% decline in the Dow.
Which brings us to Main Street’s “exception” to the stocks down, gold up rule: A greenback rally to 11-month highs. To wit: “Gold Drops On Dollar Gains. The dollar’s strength or weakness remains the number one factor in determining the direction of gold.” (Sept. 3 Reuters)
Sorry Charlie, such logic does not fly. And to prove it, the July 21, 2008 Short Term Update put together a myth-busting chart of the 52-week correlation between the U.S. Dollar Index & gold, and stocks & gold since 1999. (Reprinted below)
Amidst the confusion of failed cause-and-effect analysis, it’s easy to lose track of actual events; namely this: Since setting a record high on March 17, gold prices have lost more than 20% in value. In the days leading up to the reversal, Elliott Wave International President Bob Prechter went against the bullish gold bandwagon and presented a special March 14 Elliott Wave Theorist. In Bob’s words:
“What’s Next For Gold? If the relationship shown here holds true, and if gold behaves as it did in 1980, it should peak concurrently with the economy.”