Amazing! The Dow plummets 311 points (down 450 points at the day’s low) on continued bad news out of the housing sector, and gold falls $10.50, on top of yesterday’s $10.70 drop. Also blamed for the Dow’s decline: renewed concerns about the credit markets. Yesterday, Chrysler and Alliance Boots Plc failed to find buyers for $20 billion of loans to pay for their buyouts, said a Bloomberg report.
In addition to renewed concerns in the housing industry, now there’s the matter of availability of funds for corporate mergers, which fueled much of the stock market’s climb over the past two years. With stocks so high, you’d think the corporations would be selling stock for capital, but they prefer to borrow.
Meanwhile, US treasuries, considered the safest of all paper instruments, benefited from the stock decline as sellers moved their funds to the less volatile treasuries. The yield on benchmark 10-year Treasury notes fall as cash pours in.
Really, though, isn’t gold supposed to be the ultimate safe haven during times of financial uncertainty? Shouldn’t gold go up on such a huge stock decline? Ordinarily, the answer is yes, but not this time. Besides, we cannot describe the recent stock declines as anywhere near chaotic enough to send average investors into gold.
Stock investors have seen in recent years huge declines only to watch prices rebound shortly thereafter. For example, February 27 the Dow fell 417 points, but recaptured that loss in six weeks. From there, the Dow climbed steadily climbed until it topped 14,000 two weeks ago. With such a stellar performance, stock investors are not too concerned and moved to treasuries for temporary safety. If conditions worsen in stocks, however, we could see some of that flight money landing in gold.
Additionally, many investors are so confident stocks are headed higher, albeit corrections along the way, that they sell even gold to meet margin requirements and to take new stock positions. If stocks put in a prolonged decline, it will be a different matter.
Meanwhile, an analyst who has a good track record in predicting short-term prices in gold tells me that he sees the downside in gold being $650, which is only $12 off today’s close. We like gold and silver prices at these levels, believing that we are in a long-term secular precious metals bull market. In bull markets, buying the dips results in lower average costs over the long haul.
