Focus On Market Growth, Strong Resources And A Weaker Gold

Includes: DBC, GLD, SPY
by: Goombarh

Yesterday saw the markets consolidating, prior to making a new push beyond the highs of 2011. It may be appropriate to examine the outlook going forward for 2012. The longer term chart below shows the S&P 500 index for the past three years:

Click on the chart to enlarge

Click to enlarge

Clearly the markets have rallied successfully from the crash of 2008. 2009 was the year of the great rebound from the bottom in March 2009. 2010 started with indecision, but then moved upwards strongly in the summer. 2011 consolidated in the spring and then endured a retracement backwards in the latter half of the year. Now in 2012, the markets are poised to move forward strongly.

The daily chart of the S & P 500 is below:

Click on the chart to enlarge

Click to enlarge

The bottom of the 2011 retracement occurred at the beginning of October, and there was indecision until the beginning of this year. Then in 2012, it has pretty well been an inclined trace forward, defying any cynics who are still gasping in disbelief. Presently, the index has halted the steep climb and is consolidating.

Note that the chart shows a Golden Cross at the beginning of February, marked with a yellow circle in the chart above. A Golden Cross is the term that chart analysts give to the 50 day moving average crossing the 200 day moving average. Essentially, it means the short term momentum is strong and is reversing the longer term movement upwards.

Is this the top, and will the markets plunge from here, or is this a plateau for a pause that refreshes prior to a renewed push going forwards?

Outlook for Markets

To answer the question and to prepare the proper positioning for the markets, I search for other opinions. In Ken Fisher's latest missive of market outlook for 2012 he talks about 2012 as being an election year. He states that China's leaders need a good economy (you thought I was talking about America here, didn't you) to "maintain stability during the handover of power". Of course, it is an election year in the USA as well-- do you think the government presently in power wants to create anything disruptive in the economy this year?

Therefore, we have the leaders of the two largest economies in the world directing their markets to perform well. The market outlook is bound to be positive this year.

Outlook for Resources

In Bloomberg's recent story Feb 7, 2012 about the state of the Emerging Markets, they paint China as the Lone BRIC Among Top Emerging Markets still growing strongly. Here is the defining quote in this article:

After decades of topping 10 percent annually, China will expand at an average pace of 9.4 percent from 2012 to 2016, the IMF forecast in September. That still outpaces any other country in the ranking.

Yes, the pundits are calling for the economy in China to crash, but the IMF is predicting a growth rate of 9+% for the next 4 years. I am inclined to side with the IMF opinion.

Further, Bloomberg has an excellent story about the "Peak Concept" in almost anything that is a Natural Resource. Here is the central quote from that story:

The iconic Peak Oil example has inspired parlor-game questions about other resources. Some, like coal, are finite; others, like water, are renewable but have limits to how quickly reserves can be replenished. Can Earth keep up with our demand? Call it Peak Everything.

Therefore, the outlook for natural resources is a matter of supply and demand. The middle classes in the world are growing at an awesome rate, and will triple in size over the next 20 years. This bodes well for investment in the natural resources sector for the longer term.

Outlook for Precious Metals

Now it is time for the controversial opinion about what lies ahead for precious metals. The last three years of the gold price in USD$ is shown here:

Click on the chart to enlarge

Click to enlarge

Note the great leap forward in gold prices for the last three years, where prices have essentially doubled from $900 to about $1800 an ounce. This was reflecting the uncertainty of the masses about growth going forward, as the masses looked to precious metals such as gold to preserve their wealth. The gold price reached a peak in September of 2011 and has been retracing since. The shorter term daily chart of prices for gold follows:

Click on the chart to enlarge

Click to enlarge

Note that the daily gold price chart above is portending a "Death Cross". The Death Cross is a term where the 50 day moving average of the prices crosses over the longer term 200 day moving average. Critically, this is presaging a loss of momentum in the prices and is indicating that the gold price will be heading lower. This is an important point for astute investors.

In the markets, it is all about supply and demand. If the general markets are looking good, investors will flock to invest. As gold fundamentally "has no value", as deemed by Warren Buffett, investors may feel less need to preserve their wealth in gold as a safety measure. If the demand for gold slows, then the price will tumble. The recent price action indicates that it may be wise for your wallet to exit gold at present.


1. Market outlook is strongly driven by U.S. and China's leaders.

2. Resource sector is strongly driven by middle class demand.

3. Gold sector is weak as demand falters.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.