Intermarket Analysis: Profiting from Global Market Relationships

CHAPTER 10

Shifting from Paper to Hard Assets

GOLD COMES BACK INTO FAVOR

Gold is often used as a proxy for the entire commodity sector. This is probably due to its long history as a store of value and the fact that it is the most recognizable of all the commodity markets (with the possible exception of oil). Radio and television business shows always quote the price of gold, but not necessarily the price of cotton or soybeans. It is also relatively easy for investors to take advantage of gold trends by either buying individual gold shares or putting money into a precious metals mutual fund. Historically, the trend of gold is tied to trends in the general commodity price level.

Gold surged over $700 during the 1970s when commodity markets as a group were in major uptrends. Gold peaked in 1980 just as the commodity bubble was bursting. It then declined for the next 20 years as commodity prices fell out of favor. Gold also has a history of leading turns in the general commodity price level. As a result, what gold does has a major bearing on the direction of commodity prices and the public’s perception of the attractiveness of commodities as an investment alternative to bonds and stocks. In addition, for the first time in 20 years, gold and commodities have been attracting attention—at the expense of bonds and stocks.

GOLD BREAKS 15-YEAR RESISTANCE LINE

Long-term charts are the most useful for spotting major trend changes. This is true for all markets. When prices break trendlines ...