Friday, July 9, 2010

Gold Continues Safe Haven Status

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Before I get to the theme of today’s post, I wanted to offer a quick stock market update. Several weeks ago in Let's not Forget the Dead, I mentioned that our investment models raised some warning flags and although I still had a generally positive “feel” on stocks, we did some significant selling around Dow 10,400 and S&P 1116 to carry at least 50% (if not more) cash in most portfolios.

That changed last week as the 8-10% decline across the major indices was enough for our models to start putting money back to work on July 1. While I do not believe this is the launching ground to new 2010 highs, the odds do favor a 5-10% rally over the coming weeks as earnings season officially kicks off next week with Alcoa. This is one period where I will be dancing very close to the door and not be overexposed to risk.

Now, on with the “meat” for today…

Although the second quarter of 2010 was not kind to the equity markets, the forces that be rewarded precious metals investors, along with their cousins in the gold and silver mining stock sector. Gold tacked on another $100 plus as fears over a European sovereign debt default saw Euro currency investors run for the exits under the cover of gold and the U.S. dollar. But wait… gold and the dollar rallying together? Don’t they always trade inversely (opposite) like the rest of the commodity space? They usually do during “normal” times, but these times are far from anything “normal”.

Gold and the dollar (including U.S. treasuries) have been some of the few safe havens this year in the financial markets. What’s different now from 2008 is that during the deflationary, panic-driven collapse that hit after Lehman’s bankruptcy, all assets except for the Japanese Yen and U.S. treasuries were decimated, including precious metals. This year, and specifically since the April peak in the stock market, the metals complex was added to the “protected” list.

Although our posture on gold often swings from very positive to very negative (and everywhere in between), we’ve been bullish over the intermediate-term since our contribution entitled Gold Getting Ready for Another Assault. At the same time, and over the past three years, we’ve remained very negative on inflation, meaning that we do not foresee any meaningful rise for the foreseeable future. While that may run counter to your intuitive thinking, gold and the Consumer Price Index (CPI) do not have a very strong historic correlation, which says that gold is not the perfect hedge against inflation.

Since its major bottom in October 2008, gold has rallied roughly 85% without any sign of inflation. At the same time, the dollar is essentially unchanged. We believe that gold’s shine during the attempted, but failed, reflation by the Fed as well as its performance during the current mild deflation continues to indicate a solid bid (underlying strength) beneath the market as global investors seek refuge from paper currencies. Until that sentiment changes with another tsunami of powerful, deflationary deleveraging, precious metals can continue to be bought into normal, routine and healthy bull markets corrections, like the one we are currently seeing.

I am scheduled to be on CNBC’s The Call this Monday, July 12th, between 11:05am and 11:20am. You can view all of our past media appearances, good, bad and disastrous right here.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz
Heritage Capital LLC

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