What Goes Up...

What Goes Up... 

Many analysts are assigning today's rise in gold to short covering and bargain hunting. An odd assessment given the behavior of gold last week. 

What's really happening is that there is a sudden lack of faith in the equities markets. The lowball jobs number that came in on Friday and the rather blasé FOMC minutes issued on Wednesday have given pause to the rah-rah-rah-ing that has dominated trading on the stock exchanges for the last year.

Now equities traders are facing a new earnings season and from what they are smelling in the air, there is not a whole lot to like. (A more nuanced look at that below.) This became even more apparent when holiday retail sales were deemed soft, even with a mighty assist from online retailers.

Moreover, like it or not, the tapering of QE3 is going to affect stocks more drastically than any other instrument. For gold bulls this may seem counterintuitive. But, gold (and to a lesser extent silver) have already been put through the ringer. With the slimming down of the chunky bond/asset purchases by the Fed, the signal says that money will become much more expensive up and down the line in the long run, although there are counter currents to that, too.

Gold has already taken its lumps as fear was shooed out of the economy, replaced by a mildly optimistic outlook for the next year or so.

It is not exactly the level of earnings that has stock traders nervous. It is the P/E ratios, the overvaluation of equities that is beginning to give them the heebie-jeebies. There is more and more chatter in the air using the word "over-valued."

This perhaps make gold look undervalued in relation to equities. 

On top of this, the dollar slid today, giving a small helping hand to gold in its very modest rise (as of 3:30 New York time). 

Crude is down, heading toward $90 per barrel once more. More significantly for gold and silver traders, the 10-year bond has backed off from the 3% mark,

This could be because the U.S.government deficit for October, November and December was "only" $174 billion, which is a whopping $120 billion below the same period the year before, reflecting continued improvement in the American economy, a robust increase in tax revenue and solidly lower spending.

The drop foretells less need for the government to borrow and therefore Fed paper is less in demand.

However, before you put your party hat on, that development also points toward subdued inflation, which is not a positive for gold.

As always, wishing you good trading,