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Gold/Silver stocks on the move

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Precious metals stocks are on the move today and back above the $55 level for this index. We've talked about how this group may play into further bullishness for the broader market longer-term. My thoughts have been that a higher Gold/Silver Index (XAU.X) might be found on thoughts of "inflation." Inflation in a slow economy?

Some will think that inflation is a "dirty" word. At different times of an economic cycle, inflation is a dirty word, but not necessarily at the beginning of what could be an economic recovery.

Let's face it. The recent economic data shows no sign of inflation. But most believe the market is a forward looking instrument that often times is very accurate at "predicting" the future. Just as it has made "no sense" that Treasury bonds have seen selling in recent weeks when the Fed has continued to cut interest rates, the action in Gold/Silver stocks in recent weeks makes no sense with lackluster economic data. Eventually it does make sense when months from now we may start hearing the "Greenspan bashers" start saying that Mr. Greenspan was too aggressive with his interest rate cuts.

Gold and Silver Index Chart -

It's interesting to note how Gold/Silver stocks shot higher earlier this spring, yet the terrorist action in September didn't see this index setting a new high. Gold is often thought of as a "hedge" against inflation, but also a "hedge" against currency woes. In the April-May periods, I feel this index moved higher based on early thought of an economic turn. The group moved step for step with bond YIELDS. In September, bond YIELDS plummeted as investors scrambled to the safety of bonds, yet gold stocks did rebound a bit, but I think "smart money" felt that the U.S. currency could withstand the brief concerns related to terrorism.

I do NOT feel that this index is moving higher based on renewed fears of terrorism. The MARKET usually doesn't speculate on these type of events, but the MARKET does tend to look at the economy on a going forward basis.

I think a more gradual move higher longer-term is actually "healthy" for the stock market going forward. I would be concerned about a real sharp rise from current levels as this may indicate the MARKET has some type of knowledge of too much growth occurring from the recent Fed cutting of interest rates. The reason that too much growth early on may be viewed as "bad" is that we don't want to see a surge in inflationary pressures that would cause the Fed to begin tightening rates and perhaps squash an economic recovery.

Many people talk about "the message of the markets." Here's one index that his hinting toward some type of future inflation. Inflation was also a concern at NASDAQ Composite 5000! We never really saw inflation get out of hand at that point and the Gold/Silver Index (XAU.X) was telling us that inflation wasn't a concern for the market as the index trended lower. Most equity bulls that tie "inflation concern" and "NASDAQ Composite $5000" together can only hope there is some type of concern building for inflation going forward. Inflation usually comes with some type of economic growth.

Since the economy has been in the tank, then perhaps growth really is around the corner. The action in the Treasury bond market has been confirming this. Interesting that the 10-year YIELD and the XAU.X are now getting above their 200-day moving averages. Considered a longer-term moving average.

Jeff Bailey
Senior Market Technician
Option Investor

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