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Goldilocks is Coming To Town

by: Gary Tanashian September 13, 2006 | about stocks: GGN / GLD / IAU    
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Gary Tanashian submits: Okay gold bugs, what we have here is Goldilocks come to town. The story is spreading in the mainstream and it will likely stick around long enough for the Dow/Gold ratio to reset itself from severely oversold conditions. I have previously noted that there were many bearish divergences in the markets but that the nagging bullish indicator was that the public was incredibly bearish. How often is the public right? Well, Joe Sixpack's record is no longer in danger of being broken; he's wrong again. Here is something I posted on the blog on August 16th:

Do you remember I mentioned that everything was falling into place for a bearish stance on the market with one nagging exception? That being the public's downright bearishness? Well not only did Joe 6's bearishness put a safety net under the pig, but it proved to be downright bullish in the short term. Well, you know Joe. He is going to start questioning himself now. He is sidelines in CD's and money markets, where he should be. But Joe has more important things to see to than looking too deeply into macroeconomics. Joe is hearing Wall St's song of the paused Fed and it sounds good to him. The markets have higher to go now short term IMO, and they may head for the cyclical bull market highs - with Joe on board! Final piece of the bearish puzzle solved.

It is true that I have gone bearish in the short term but if I were good enough to predict the exact moment this mess will unravel, well you know I would own my own tropical island, have my favorite rock bands flying in to play for me and be trading on a laptop on the beach (not caring how many options trades I blow ). So, my crystal ball is really just made of glass and in it I see commodities topped out (here is the August 17th chart from the blog where it was first red flagged)...

...gold getting taken along for the ride (something I expected but for fundamental reasons I have decided to endure - this time), a really bullish SOX chart down there helping signal that slap-happy technology bulls have some room to stretch their legs, a yield curve quietly attempting to form a major bottom, a real estate market unwinding, national and public debt so extreme it will never be effectively serviced...and so on with the fundamentally bearish macro.

I will also note that I find it perfectly sensible to be bearish while allowing for the possibility that Goldilocks will mutate into something even more absurd; a downright spectacular stock bubble. Meet the new bubble, same as the old bubble. If manipulative forces are as extreme as some think, with Bernanke and Paulson flying the markets on remote control, then the sky is the limit given the fragile psyche of the good old US of A. I believe they are gamers extraordinaire, but I do not believe they are running the show.

More likely, and scarily it is a major "foundation" of the global economy that is running the Goldilocks theme: the massive hedge fund community. Rotation into the anti-inflation trade. The early adopters saw indicators like the SOX bottom and went with it. The public will be brought into the fold, commodities will indeed remain down for some time and gold will bottom. I don't expect this to be a long running process however. In the meantime, stocks are good, gold is just a commodity and the macro mindset is in the process of going schizoidally from inflation fears to contraction/recession/deflation fears, just as I have been noting in my script all along. We will do well to remember that the Fed desperately needed the herds on this side of the boat. They are fighting for standing room on the starboard side!

Here is another chart produced this morning on the blog that helps illustrate some Goldilocks parameters:

Editor's Note: ETFs covering the gold market are (GGN), (GLD) and (IAU).

Gary Tanashian

Gary Tanashian

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