Gold’s Breakout and What It Might Mean
Divergences in market behavior are important to observe to gain clues about what is going on. Gold tends to follow three major correlation paths: 1) As a leading indicator of potential credit or currency events or 2) an inflation play when it moves in tandem with oil 3) as sort of an inverse play on the US dollar—when the dollar tanks, gold rises and vice versa. For the last few months, gold moved up along with other commodities and inverse the falling dollar. This indicated both prospect for future inflation and for further currency weakness. Right now we are seeing the US dollar hold in a tight range near its lows, oil and other commodities start to weaken, while gold is making a major breakout. The divergence implies that the force behind the gold breakout is something other than simply inflation expectations or fear of a weakening dollar. My bias is that this divergence indicates either 1) the known existence of something burning on the credit front that we are currently not aware of OR 2) simply the fear or expectation of some sort of bank failure or credit event. Only time will tell which of these two scenarios gold is reflecting. A final possible, but less likely scenario is that gold is forecasting a serious breakdown in the US dollar–an event that I would discount given that the lead/lag relationship between the two is generally very tight and appears to occur almost concurrently.