(Kitco News) - Gold, crude oil and equity markets are all moving in the same general direction, which is an unusual situation.
Normally these markets are not linked together since gold and crude oil are generally considered safe-haven assets and equity markets are considered a risky asset.
On Wednesday, all three markets were weaker, with gold leading the downside. For this year, though, gold and equities have risen in lock-step, while crude oil has shown stout gains for February. Comments by Federal Reserve Chairman Ben Bernanke in front of Congress put a damper on ideas for a third round of quantitative easing when he said recently improving jobs reports will mean policy-makers must watch future data considering the now “somewhat different signals.”
All three have risen to be in reach of critical resistance levels before Wednesday’s correction. April Comex gold futures have come close to $1,800 an ounce, March CME S&P 500 stock index futures were just under 1400 and Nymex April crude oil was near $110 a barrel. Profit taking near the resistance areas, particularly for gold, was also cited for the session’s break. April gold settled at $1,711.30, April crude oil settled at $107.07 and March S&Ps were trading around 1363 in late day action.
These resistance areas could be placeholders for now, market watchers said.
EQUITIES TO HAVE TROUBLE SUSTAINING GAINS
Sterling Smith, commodity trading adviser at Country Hedging, said the S&P 500 rallying days are numbered. “So far the way the S&Ps have traded, they cannot sustain the pace of the current rally. Higher gasoline prices might take the steam out. We saw durable goods (Tuesday) were horrible and the Case-Shiller data had nothing good on housing. I think the best part of the gains S&P will see this year have already happened,” he said.
Durable goods orders, which are orders for products that will last more than three years, fell 4% on Tuesday and the S&P/Case-Shiller index of property values in 20 cities declined in December to the lowest level since the housing crisis started.
Gold, he pointed out, has not had a significant correction since starting on its rally from the December lows. Additionally, for a market that is “hungry” for another quantitative easing, the Bernanke comments and the strong Chicago PMI employment figures would not feed the bulls.
Yet Smith doesn’t think that gold is acting as a risk asset and following S&Ps. Rather gold is trading as a proxy for currency weakness and Wednesday’s action doesn’t change that view.
The gold market could be in store for more weakness as it closed on its lows Wednesday. Support is put at $1,700. Smith said the market could “easily” take another $100 off the current price as when the momentum for gold losses builds, it can last a few days.
If gold can eventually rally back and close over $1,800, there is the possibility of it going to $2,250 “in concept,” he said, adding that volatile moves may occur in between that time.
Ross Norman, chief executive officer of Sharps Pixley, said there are two reasons why gold and S&Ps are so correlated. One is coincidental, that the gold market benefitted from Chinese buying, crude oil is up on the concerns over Iran and stocks have rallied because of generally positive economic data in the U.S.
The other argument is that the ultra-loose monetary policy and low interest rate environment from the Fed and other central banks supports both gold and equities, albeit for different reasons. For gold, this monetary policy creates the possibility of inflation in the future and low interest rates give producers no reason to sell gold forward. For equities, the policy makes credit easier to access and makes equities look better than other interest-bearing markets.
Walter Zimmerman, chief technical analyst at United-ICAP, thinks that both stocks and gold are hitting resistance, especially if crude oil continues to climb.
The stock market is “priced to perfection,” he said. He said that based on bullish consensus data from Market Vane, S&Ps may be poised to drop. As of last week, the bullish consensus was 66% for S&Ps and at every major top since 2000 bullish consensus has been in the high 60 percentile. He said that the rally since late November in S&Ps is a bearish rising wedge formation on technical charts, not a bullish up trend channel.
Zimmerman said gold will have any near-term gains capped unless there is another global financial crisis. If gold can have a “decisive close” above $1,862, then there is a chance for a move to $2,300. His absolute “must hold” area for gold is $1,523.90.
He is also watching the rally in gasoline. He said over the last 30 years of gasoline seasonal peaks, even with Middle East wars, gasoline has managed to peak in the spring. The earliest pre-season peak was in March 10, 2003. The April Nymex gasoline futures contract, which becomes the spot month on Thursday, is quickly reaching $3.4650 a gallon, its 28-year average pre-season rally price target, he said. On Wednesday it was trading around $3.2589 Zimmerman said either the gasoline market is about to set its earliest preseason peak ever, or this year’s pre-season rally will exceed the extent of an average pre-season rally. “There is certainly nothing to compel any gasoline pre-season rally to peak into the vicinity of the price target for an average pre-season rally. However, there does seem to be something that compels the gasoline pre-season rally to peak into the spring. It is still winter,” he said.
STILL FUNDAMENTAL REASONS FOR STOCK MARKET STRENGTH
Not everyone is so bearish on equities, at least in a longer-term viewpoint. Strong corporate earnings and continued easy money policies from the Fed and other central banks are giving equities a lift. Plus, the worst-case fears that had a stranglehold on markets late last year have not materialized, said Pat O’Hare, chief market analyst at Briefing Research.
Many people have cited the sharp rise in energy prices this month as a potential drag on stocks. The tensions between Iran and Israel are cited for the price rally, but O’Hare said there are other fundamental reasons for the gains. “If you look back, the (stock) market held remarkably well after the Iran news,” he said.
Some refineries on the U.S. east coast had closed, causing a rise in gasoline prices in that region. Plus, he said as the U.S. economy improves, that will lead to rising oil prices. “An improving economy lifts demand,” he said, especially if the labor market grows and unemployment drops.
With retail gasoline prices nearing the $4-a-gallon level, it bears watching as that area could be a breaking point for U.S. consumers, he cautions.
The wild card will be if Israeli attacks Iran. “Then that’s a different scenario and we would have to look again at the markets,” O’Hare said.
Source; http://www.kitco.com/reports/KitcoNews20120229DeC_focus.html
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