A Golden Parachute of a Bearish Kind ~ The Risk Averse Alert

Wednesday, November 25, 2009

A Golden Parachute of a Bearish Kind

Although not correlating nearly as closely as Treasury security yields have over the past several years to movement of risk capital into and out of the stock market, there is another perceived safe haven investment receiving a great deal of love and affection these days whose present state — much like the 5-year U.S. Treasury note — serves as a cold bucket of water thrown in the face of anyone so blinded by the stock market's seeming buoyancy to think the worst of the collapse of Wall Street's securitization business is passed, making equity an attractive investment.

Of course, I am referring to that crazy yellow metal — the glittering joy of Monetarist Monkeys possessing kind regard for considerably less conniving aristocrats of the 19th century whose financial regulatory schemes at least had the appearance of being connected to something godly, if only by the rarity of the earthly presence of that object aiding and abetting their restrictive control over the affairs of mankind — gold...


Well, there obviously is no arguing gold's present trend. Yet the same might have been said back in October 2007, too. Indeed, one could argue that something of a breakout in gold occurred then, as also is occurring now. And what other significant event happened in the latter half of '07? Oh yeah! The stock market hit a brick wall.

One other worthy note. When capital-starved interests were hitting up the stock market in '08 ... looking to plug serious holes left by the collapse of Wall Street's securitization business ... they didn't restrict their desperate money sucking operations to equities. They hit up the gold market, as well.

Since further fallout from the failure of Wall Street's credit creating machine remains a serious [and near-certain] threat, one can expect that, along with the stock market likely being hit up again over months ahead, so too the gold market probably will be drained in kind.

(Yet remaining to be seen is how much higher gold might rise before being sold by those desperate for cash. For all I know gold could rise to $5000, then pull back only to $2500 ... while at the same time major stock indexes, soon likely to hit top, inevitably collapse back to levels last seen in the late '80s. In other words, gold prices at present might be a screaming bargain. Judging by recent price action, it appears buyers have convincing reason to believe this, indeed, is so.)

Spot Gold
Gold - Afternoon Fix (Source N M Rothschild)

You might say the gold trend over the past decade adds weight to my thesis that, since the late-'90s stocks have been distributed from strong hands to weak.

Think of it this way...

What is attractive about an unproductive asset like gold in comparison to a cash-generating asset like equity? Unless, of course, equity's capacity to partake of free cash generated via normal business operations is seen diminishing. And is not money flooding into gold suggesting such a view is prevailing?

Therefore, in the midst of gold's rising trend a stock market contrarily trading more or less sideways might correctly be seen as having embarked upon a distribution of over-priced shares into weak hands.

Fast Money
* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!