Gold's Resolve May Be Ominous

June 16, 2003
By Peter Brimelow, CBS.MarketWatch.com

NEW YORK (CBS.MW) -- Happy (equity) days are here again? But gold is still suspiciously solid.

The stock market's fairly steady upward march since -- well, March -- is tipping many market timers into bullishness, at least according to their long-stated markers.

The Hulbert Stock Newsletter Sentiment Index shows that the average equity exposure of the services monitored by the Hulbert Financial Digest is 48.8 per cent -- positive, but not as alarmingly euphoric as in early May, when it was 54.7 percent, up 74 points since March.

And in fact, the Dow did mark time before beginning a new upward move this month.

Gold, by contrast, has been staggering since May.

But, as of Friday night, the Hulbert Gold Newsletter Sentiment Index [HGNSI] shows an average exposure of 34.62 percent, stoically in the middle of its historic range.

The gold timers were equally indifferent, on average, to bullion's dramatic drop early last week, or to its partial recover late last week.

That's quite impressive.

How would it be possible for gold to go up in the context of a sustained stock market rally?

One barbed explanation is offered by Investech's James Stack:

"Hellbent on avoiding a Japanese scenario (after Japan's bubble burst in 1989), Alan Greenspan & Co. are driving real interest rates, after inflation, deep into negative territory. They're making it so unattractive to hold onto cash that it's fueling a buying frenzy in any hard asset -- including real estate, gold and stocks of US corporations. This is not the kind of bull market which we find most comfortable."

Stack has long been famous for his bearishness. Recently he has become bullish. But he believes that strength nevertheless may persist in gold, so "we may be increasing our allocation in gold stocks (Newmont Mining) or a precious metals fund."

In other words, the stock market may go up... for a while. But happy days may not necessarily last -- except perhaps for gold.

A similar complexity appears in the work of Martin Pring, author of the bible for this generation of technicians, "Technical Analysis Explained."

Pring gave up on gold when it broke below $360 -- for now. But he has just commented in his Weekly Update service:

"Last week the Gold Share/Gold Ratio broke decisively above a 1-year down trendline. This means that the shares are now likely to outperform the metal. We regard this as a bullish sign for the point when the anticipated correction in the yellow metal has run its course and prices again make an attempt on the $400 area."

And them there's Dow Theory Letters' Richard Russell. As always.

Not the least of this stellar septuagenarian's remarkable skills is that he thinks about the U.S. dollar exchange rate and its impact on the financial markets -- a great gap in the thinking of both Wall Street and (unusually) the investment letter subculture.

Russell says flatly that "the KEY to the picture is the dollar. If the dollar holds up or declines 'lightly and politely,' then the Fed can keep the show going. But if the dollar starts falling apart, the all bets are off."

If gold had reciprocated the dollar's decline since the beginning of the year, it would now be about $383 an ounce. Maybe that's why the bulls are calm.

Another entertaining thought: On Friday, Russell repeated his long-time forecast that "before this bear market is over, one share of the Dow will buy close to one ounce of gold."

He also said that in the 1970s. And it nearly came true.

Editor's note: The June edition of the Hulbert Financial Digest is now available by either e-mail or regular mail. Highlights this month include:

* Did the March low mark the end of the 2000-2003 bear market? Contrarian analysis sheds light on an urgent matter.
* Profiles of All Star Fund Trader, F.X.C. Newsletter, Investment Reporter and No-Load Fund Analyst
* Complete performance scorecard, and more

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