SeeTheLight

Wednesday Outlook: Commodities, Global Markets

Although there is a high inverse correlation between Gold and the USD (for the obvious reason that Gold is most commonly quoted in the dollar), if we see a significant pullback here you could see both rise in a "flight to safety" as the goldbugs go to their preferred bunker and the institutional investors search for safety by buying treasuries.

Personally I believe a pullback is inevitable, already China is turning down the stimulus spigot (in the form of credit tightening) and its only a matter of time before the US is forced to dial back its own largesse. Anyone that believes that the stimulus has been successful in jump starting the economy is likely blinding themselves to the fact that nothing really has been repaired, and once the punch bowl is removed the economic engine will likely sputter and died.

But the question is when. You mentioned that we are seeing a reversal in behavior as good news is being sold off. We are seeing another battle between the momentum bulls and the fundamentalist bears. The bulls could win another battle here, but the war will inevitably favor the bears in my opinion, since all this stimulus has accomplish is a redistribution of wealth, not any ongoing growth.

Personally I am being very careful in any equity longs I have remaining, with moderate positions in UUP and in CEF (Gold / Silver), which represent good risk/reward to me. The rest remains in cash in the expectation of a return to deflation or low inflation for the next 12-18 months. I'm also considering moving a bit into TLT but its risk / reward is less compelling to me than the other two.

Good Luck all