Gold as a Growth Stock Indicator

Growth stocks are cheap. Some examples include Apple (AAPL) trading at 25 times 2008 earnings, Mercadolibre (MELI) trading at 65 times while growing its bottom line north of 100%, and Baidu (BIDU) trading at 64 times while growing at 80%.

The reason growth stocks are cheap is (obviously) because of the risks to growth, which include asset deflation in housing and the raging credit crisis that goes along with it. So what’s one way to tell whether the market is thinking (or fearing) that the crisis is going to spread further and cause more bad news? The answer is gold.

When gold made a double top in late November, Mercadolibre (MELI) began a major run that lasted until late December, which ended when gold broke out of its consolidation and went on to knew highs. Gold looks like it may have made a double top on February 11^th the same day that Mercadolibre made a large move up off of its lows.

Gold tends to be bought as a safe-haven, when there is a risk of recession, interest rates are going lower, currencies are weakening, and when the financial system is in turmoil. Mercadolibre is an e-commerce company in central and south America that is very leveraged to economic growth.

Gold is acting as a leading indicator. If gold makes new highs, look for more weakness in growth stocks. If it doesn’t, let the good times roll.

Disclosure: I own shares in Mercadolibre (MELI)