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Breakout in Gold Could Signal Equity Bull Market

In my previous posts, I regarded the move in Gold as unsustainable in the short-term, attributing it to normal safe haven/hedging activities. Well, I am currently rethinking my position on why Gold is moving up and there may be more to this move than what I previously thought. Today, the spot price of Gold has moved above the psychological $1000 level and I have been prompted to review the past performance of Gold relative to equity markets.

Below you see the performance of Gold relative to the S&P 500 index for the past ten years. This includes the beginning and end of the last bear market during 1999-2002, and the bull market we had until 2007. As you can see, during bear markets Gold moves INVERSELY with equities, while in bull markets Gold has moved WITH equities. What is important here is the direction of the moves and not the magnitude.

We could also see that Gold started moving inversely with stocks as we moved into a bear market towards the end of 2007. However, this inverse relationship has reversed just last April 2009. And the recent outperformance of Gold and resilience of equities may be an indication that of a portending bull market in both, but more importantly the latter. What's the logic behind this joint move in Gold and equities as we enter bull markets? Take note that the last recovery from a recession was induced by money printing and what do we have right now... more money printing but on a global scale! While I admit that the US consumer will still encounter more headwinds, the global stimulus will buy enough time for the consumer to recover. Coincidentally, the headline at Yahoo! Finance today reads: "World Stocks Rise on G-20 Stimulus Pledge".Also read my previous article on why we must not discount emerging markets and the fact that S&P 500 earnings are more global now. So while Gold's move may possibly see some choppiness, I believe it is a legitimate move... and so is the move in stocks.