Intermarket Picture in Spring 2003


By the middle of 2002, the bear market in stocks was in its second year with no end in sight. Stocks were not the only asset class in a bear trend. Stocks had peaked during 2000. By the start of 2001, commodity prices had also peaked and entered a major decline of their own. Bond prices had been rising since the start of 2000. All three markets appeared to be following their deflationary script described in previous chapters. (During a deflation, bond prices rise while stocks and commodities fall.) The bond market was not the only place in which to make money, however. Gold (and gold stocks) were rising for the first time in years. Part of the move into gold was a flight from a falling stock market. A large part of it, however, was also tied to a fall in the U.S. dollar. The dollar had been in a bull market since 1995. By the end of 2000, the dollar stopped going up and started moving sideways.
By the spring of 2002, however, the dollar rolled over and entered a new downtrend. One of the key intermarket principles is that a falling dollar is bullish for gold. The dollar breakdown gave a big boost to gold and gold-related shares. Another intermarket principle is that gold usually trends in the opposite direction of the stock market. The combination of a falling stock market—and a falling dollar—lit a fire under gold (and gold stocks). A more subtle intermarket influence was also present in the relationship between gold ...

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