Gold and shares make love not war

Andrew Pegler – 27 November 09

This GFC has made a habit of chucking accepted conventions of economics out the window (no Great Depression gags please). Black is now white, up is now down etc. The reversal of the price relationship of gold and shares is the latest. Traditionally they go in opposite directions but they’re not following the script and this presents opportunities for savvy investors.

As you may know, the shiny stuff has shot up 30% this year and the market has risen 50% since its March smashing. This is weird because the two usually enjoy a sort of Turnbull/Rudd relationship i.e. travel in opposite directions. This is because in a recession gold is safe and predictable like a network news anchorman while shares are like most FM morning crews: unpredictable and bad.

Since things have started to turn good, shares have had stunning bounce even by dead-cat standards. This is because, while shares are the first things to suffer in bad times, they are also the first thing to sniff a recovery. And if you add to that the fact that bank deposits are paying near zero interest in the US then investing in a rocketing shares market is a no-brainer.

It’s the gold thing where it becomes interesting and it’s all to do with the weak US dollar.

The falling USD since March has seen risk-averse investors buy into gold and right now hardly a day goes by without news that it has reached a new high. As I write it’s $1180 per ounce and this is because India and Sri Lanka’s central banks are buying truckloads of the stuff to reduce their reliance on the declining and unstable USD. Basically, like many investors and central banks, they’re not happy with the dependence of the global monetary system on the health of the USD, which, as I have written before, is unwell. In fact right now the USD is at its weakest since the late 60s and is 30% down from its peak in 2002. So in line with the laws of supply and demand the more people buy gold, the more its value rises and that’s why we have this weird situation where gold and shares prices are rising in tandem. Capiche?

And in other news… US consumer spending and incomes rose in October, new-home sales unexpectedly climbed and jobless claims fell to their lowest level in 12 months. My strong interest in such US data is simple – once the US motor starts humming again we can all call time on this mess and these figures bode well for fourth quarter US GDP growth of close to 3%. Is that light I can see at the end of the tunnel?