Gold Gained On Capital Flows That Should Reverse

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Includes: AGOL, GLD, IAU, OUNZ, SGOL, SPY, UUP
by: Markos Kaminis

Summary

Capital came out of stocks on a seasonal factor that I expect will reverse shortly in order to fulfill another stronger seasonal trend for December stock market strength.

Capital seemed to flow into gold as a safe haven against significant losses in stocks. The charts of the SPDR Gold Trust and SPDR S&P 500 were mirror images.

Stocks have already begun to stabilize, and I expect gold will soon change into a funding source for a stock market rally and give back Tuesday's gains.

Capital flowed out of stocks to start the day Tuesday and seems to have rushed into gold as a safe haven destination. That much is obvious given comparison of the charts of the SPDR Gold Trust (NYSE: GLD) and the SPDR S&P 500 (NYSE: SPY). But the seasonal trend driving capital from stocks should reverse shortly in a big way, and so I expect gold will give back these gains in short time.

In my market report for Tuesday I referenced a recent historical trend that indicates stocks do not perform well during the first half of December. However, historically speaking, we've seen stocks produce impressive performance for the month on the whole. That means stocks should perform extraordinarily well during the second half of the month.

In the chart comparison here, we can see that the SPDR Gold Trust opened sharply higher Tuesday as the SPDR S&P 500 opened sharply lower. They were virtually mirror images of one-another. The only variance perhaps was in the fact that stocks seemed to work their way back toward breakeven while gold held high ground. The SPY only ended the day down 0.1% while the GLD closed up 2.1%.

Over the last ten years stocks have only averaged a 0.2% gain through the first half of December, but since 1950 they have marked an average gain of 1.6% for the month on the whole. That would seem to indicate that stocks will recover in short time and possibly rally higher into the close of the year.

Just as panicked capital ran out of stocks Tuesday and sought safe haven in gold, I expect it will come out of safe havens to participate in a stock market rally to close the year. As a result, gold should shed capital to fund flows into stocks and these latest gains should go away.

The dollar, which has been a key catalyst for gold's decline this year also dropped on Tuesday. The PowerShares DB US Dollar Bullish ETF (NYSE: UUP) fell 0.5%. I see this move as flawed, as the euro actually gained on the dollar Tuesday despite news of potential trouble in Greece. Since the close of trading, the euro is already giving back ground and the GLD indicated lower in the aftermarket.

The gold short play has gotten harder as gold has approached strong supports, but the trend for dollar strength seems to me to still carry weight. Given the capital flow factor that came into play today should reverse shortly, I expect gold's latest gains to likewise give way. I cover gold regularly, so readers may find value in this column.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.