You Know the Market’s Worried When Spot Gold Moves up with the U.S. Dollar

dividend paying stocksInvestor sentiment continues to be best reflected in oil prices, which keep taking it on the chin. Certainly there’s an argument to be made that low oil prices are good for the economy and stimulative, but a WTI oil price below $85.00 a barrel reflects a global marketplace that’s very worried about the future. The worry is about slowing growth or lack of growth in the world’s most important economies.

The stock market is basically okay if the S&P 500 Index can keep itself above 1,300. Oil prices are likely to be subdued for quite a while, but the spot price of gold has been impressive. It’s possible that the correction in gold prices is over, with the marketplace so jittery on currencies. Everything, it would seem, is out of whack in financial markets. The last few years have really been unique.

This is why investment risk is so high in the current environment and why oil prices have been hit so hard. It’s very important that stock market investors be conservative. The U.S. economy is slowly creating a solid foundation for a new business cycle, but I’m afraid it’s likely we’ll get a recession first. Accordingly, there’s no particular reason to take on a lot of new positions in the stock market. Certainly one can invest in higher dividend paying stocks for the income. (See The Blue-chips Hitting New All-time Highs in Spite of Stock Market’s Correction.) You can’t beat the inflation rate staying in cash.

If oil prices reflect the diminishment of expectations for the global economy, then gold prices reflect all the angst because of it. Gold prices are following a pattern—the commodity is trading very similarly to the first half of 2008, as well as mid-2006. Gold prices spiked, corrected and consolidated, and then there was a strong reacceleration. I wouldn’t be surprised at all if history repeats itself one more time; especially considering all the investment risk that’s in this marketplace.

Owning commodity-related investments is an inherently volatile strategy. You know that going in. Right now, because of low oil prices, oil stocks are doing poorly. The same thing happened to gold stocks when gold prices corrected, but now gold stocks are going back up—some quite significantly.

My view is that spot gold is going to keep trending higher going right into 2013. It’s a whole other story with oil prices. Oil prices will keep moving commensurately with economic expectations. The U.S. dollar is artificially strong right now, as global institutional investors continue to migrate to safety, and this makes the recent performance of gold prices that much more impressive. If gold is going up along with the U.S. dollar (which it typically does not), then you know speculators are worried about the future.