-- Posted Wednesday, 12 May 2010 | | Source: GoldSeek.com
By: Dr. Jeffrey Lewis
Anyone paying attention to the stock markets and the precious metals markets will tell you that the correlation that we've grown accustomed to has flip-flopped. Previously, precious metals and the stock markets traded in unison; a 2% up day for the stock markets meant 2% up in gold and silver. A drop in the stock markets meant a drop in the metals markets. However, this is no longer true, as precious metals have broken free!
Why the Trending Matters
Correlations between a commodity and an index fund may not seem to be that important. What's the big deal if the two rise and fall together, right? Actually, the correlation between silver, gold and the stock market is hugely important.
If the stock market and precious metals were to rise and fall together, it implies that the market sees them as equals; that is, when the economics improve for one, they improve equally for the other. This type of correlation between precious metals and the stock markets has existed for a very long time. When stocks were up, precious metals were up. When stocks were down, precious metals were down. The market enjoyed each investment equally. They were a Jekyll and Hyde of sorts.
The lost correlation between the stock markets and precious metals is nothing more than a bullish signal for metals. Since the stock markets and precious metals appear to be uncorrelated, and precious metals have been rising as stocks fall, it signals that the market now views them differently.
In addition, precious metals have lost their correlation to the US dollar, and precious metals are now rising even when the dollar rises. No longer are precious metals tied to any one currency. Instead they are their own currencies!
The Future for Metals
After breaking their correlation with the major markets, silver and gold are now free to trade to the positive, regardless of what happens in the stock markets. This is immense for precious metals investors, since their wealth is no longer tied to the status of the economy. In fact, precious metals, as we saw with the 1000 point free fall in the Dow Jones Industrial Average on May 6th, are actually gaining value when stocks fall.
Therefore, with the correlation broken, precious metals investors no longer have to fear deflation, as investors want precious metals in any climate. Again, they are the new currency of choice.
The non-correlated price trends also throw the idea that precious metals are bubbling right out the window. History shows us that when one industry is in a bubble, so are so many others, albeit in slightly smaller, more manageable bubbles. The only way pessimists could declare there to be a bubble in gold and silver is if the rest of the markets were rising in tandem, but they aren't, even with trillions of dollars spent in economic “stimulus.” Gold and silver aren't rising in price because investors are pricing them way out of their league; instead investors are noticing what so many of us already have—gold and silver are currencies.
Dr. Jeffrey Lewis
-- Posted Wednesday, 12 May 2010 | Digg This Article | Source: GoldSeek.com