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Debt Fueled and Low Volume Equity Rally, Gold Holds and Waits

 -- Published: Friday, 4 July 2014 | Print  | Disqus 

Today’s AM fix was USD 1,321.50, EUR 972.34 and GBP 770.69 per ounce.
Yesterday’s AM fix was USD 1,322.50, EUR 968.58 and GBP 771.27 per ounce.

Gold fell $7.30 or 0.55% yesterday to $1,319.60 per ounce and silver dropped $0.03 or 0.14% to $21.13 per ounce.

Happy July 4th to all of our U.S. readers.

Gold is down slightly but is holding on to its recent gains with gusto.

A better than expected U.S. jobs report weighed on gold yesterday, pulling the precious metal back slightly to trade at $1,320. The belief is that the U.S. economic recovery is still on track, as such investors took some profits and reduced their gold position accordingly. Meanwhile the stock market has hit all time highs, with the Dow breaking the 17,000 point barrier. The S&P 500 is trading at 1,985 and is sure to attempt a breakout above 2,000.

Debt Fueled and Dangerous

To say that the markets have gotten ahead of themselves is an understatement. Anecdotally if you look at the amount of borrowed money on the NYSE (known as margin debt), being used to speculate in the market you will see it has an almost perfect correlation with the market's rise. The appalling fact is that the very reason for the economic collapse of 2008 was the result of a decade of politically mandated hyper management of the interest rate policy that led to misallocated debt and caused repeated asset bubbles.

The informed response to that debacle was not not less debt but more debt via near zero interest rates as it makes no difference! So we are in a bubble again and this one is a whopper. Truly the Fed has a God complex and can not countenance the fact that maybe the open markets, left to their own devices and free of monopolised power, might do a good job of price discovery all by themselves.

If ever proof was needed consider that 10 Year U.S. Government bond yields are on the floor, Corporate Debt is on the floor, even Irish Government debt yields (probably one of the most indebted nations on earth) is on the floor.

Every asset has been pumped to the gills with debt driven investment capital. This is what happens when you print $6+trillion dollars over the past 6 years, as have the central banks of the world.

10 Years - S&P 500 Monthly Close versus NYSE Monthly Margin Debt (June and July 2014 Estimated)

A Weak Weak Rally

The chart below shows the S&P 500 compared with trading volume over the last 10 years. You can see the trend clearly. Although the market has risen impressively, volumes have been falling. The reasons for this are manifold. In general, though it sends a signal that the current market level is not supported well by investor sentiment.

Either the market is tapped out or recent gains are increasingly being driven by dumb money. In relation to the previous chart a lot of this volume is increasingly based on borrowed money. This rally could keep going, but when it stops it will catch lot of people off guard.

10 Years - S&P 500 Monthly Close versus S&P 500 Monthly Volumes

What To Do?

It is important that you diversify your assets across asset classes and and across jurisdictions where possible. As always seek advice from a fee based advisor. You should though consider an allocation to gold. I know I know, I am talking my own book, but that is because we here at GoldCore Bullion Services passionately believe that a small allocation (3 to 10%) to gold is an essential piece in a properly diversified portfolio.

So if you have gold, seek safe allocated segregated gold storage in a safe jurisdiction, such as Zurich or Singapore. If you do not have gold there are a myriad of options open to you, although you must be very, very careful how you buy. Have a read of our 7 Key Storage Must Haves for the safest ways to evaluate storing gold bullion. Stay away from ETF’s and pooled gold accounts, buy real bars in your name.

Mark O'Byrne is on vacation this week. Stephen Flood is covering.

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 -- Published: Friday, 4 July 2014 | E-Mail  | Print  | Source:

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