It’s Time To Buy Gold

By Ben Lockhart

In last week’s article I noted that if we were to move higher than $1217 early in the week we would then have a bullish 5 wave move up from the lows, and as long as we did not exceed $1193 on the subsequent retrace, the chances were that a rally would ensue.

Bulls should be happy this week as that pattern played out rather well. We gapped up on Sunday night and completed the initial move higher at just under $1225, fell back to $1193 by Thursday, and then began what may turn out to be the start of our next leg higher on Friday.

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Moving forward to this week a breakout above $1225 would signify that the rally is in effect, but more than the chart pattern itself there are some fundamental reasons why I believe this rally will play out.

Are equity markets weak or strong?

I have said it often enough in the past, but when equity markets are weak investors often turn to safe haven type securities like treasuries (NYSEARCA:TLT), the volatility index (NYSEARCA:VIXY), and gold (NYSEARCA:GLD).

I wrote an article a few weeks back stating that although we may head a touch higher I thought the markets (NYSEARCA:SPY) would turn lower short term, and investors should be wary of a correction that may unfold. Well we declined over 4% from the date that was written, but given we have now rallied back up to test the highs again, a fair question would be to ask whether my outlook has changed.

My answer to that question is no — we have so far not made any new highs since that forecast was made, and my expectation has not changed. I still perceive the greater risk to be to the downside in broad equity markets, and regardless of whether or not we do head slightly higher, I believe we are on the cusp of a decline and I’ll be writing in more detail on broad equities in a separate article this weekend.

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Despite weaker economic reports many Fed board members have stated that they still see a rate increase as likely this year, something the broad market is definitely sensitive to. Although the market seems to be pricing in a delay to that action, the next major report that shows improvement is likely to result in volatility. Couple that with company earnings that are expected to be relatively poor, and we have the recipe for a correction on the horizon.

More often than not, when the US market moves lower US Treasuries are bought as protection. This can be seen quite clearly in their respective charts, which show Treasuries peaking at the same time a low is formed in the S&P500 index.

Gold on the other hand has not received the same amount of “safe haven love” as Treasuries in the last few years, but are these relationships changing? Over the last 6 months gold has been purchased at roughly the same rate and time as TLT, something that is clearly evident when we compare their price patterns. Here we can see that their respective ups and downs are mirrored to more or less the same extent:

Should we see some equity market weakness over the next couple of months, we are likely to see investors turn to treasuries and gold in equal measure. A lot depends on economic numbers and investor reaction to company earnings, and given the way both gold and TLT are currently set up, we can see that this is perhaps already being anticipated by the street. Both charts are in bullish posture, and both are good candidates for gains over the next month or two.

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The important thing to note is that while treasuries were the safe haven asset of choice for investors seeking shelter from equity market weakness, the tide seems to be shifting in favor of precious metals and placing them on equal footing for the time being. This is an aspect of investor behavior we want to see continue, as for a sustained rally in gold prices to occur it needs to have the kind of investor appeal the bond market has commanded in recent years.

While the market may be pricing in a delay to a rate increase, it would appear investors remain cautious on equities and are anticipating weakness ahead. As it is, the S&P500 is up just 2.7% on the year to date and investor confidence is perhaps not as high as the sentiment indices reflect, given the poor relative performance in what is traditionally a strong part of the year. Source: