If history is any guide, we may soon see the monetary stimulus tailwinds shift away from stocks and directly into the sails of gold.
In a recent article, I discussed the diminishing impact of Fed stimulus on stocks. And following what has been a strong rally in recent months, the stock market is now overbought and appears ready to enter a period of consolidation if not outright decline. But this raises a logical question. Given that the Fed's latest stimulus program is set to continue through June, where are the monetary tailwinds likely to go? Gold is the likely destination.
For the purposes of this analysis, I will be focusing on the SPDR Gold Trust (GLD). But the same principles apply to the variety of related securities including the iShares COMEX Gold Trust (IAU), Sprott Physical Gold Trust (PHYS) and the ETFS Gold Trust (SGOL).
The following chart shows the path of gold during the three recent episodes of extraordinary monetary stimulus from the Fed in the form of QE1, QE2 and Operation Twist (stealth QE3). In each instance, gold thrashed around and traded generally sideways in the first several months after the launch of a Fed stimulus program. But it was after nearly four months following the start of both QE1 and QE2 that gold found its spark and began accelerating higher. And this shift higher in gold during QE2 coincided almost exactly with the inflection point where stocks stopped rising and began trading sideways.
click to enlarge
We could reasonably expect a similar outcome for gold the current Operation Twist (stealth QE3) cycle. Global money printing certainly remains as rampant as ever and the U.S. dollar is still chronically weak despite some recent signs of life relative to the euro. But with the fate of the euro coming increasingly in to question as the crisis unfolds, further euro deterioration may be bullish for gold in its own right.
But does the timing of a shift higher in gold make sense this time around? All in all, the timing lines up quite well for another repeat performance for gold in the latest monetary stimulus cycle. If history holds, gold would arrive at the projected inflection point somewhere between March 5 and March 20. Of course, this is precisely the time that Greece will be "resolving" its latest debt refinancing one way or another. One could easily conceive the demand for a safe haven like gold beginning to pick up just around this time if not before then.
As a result, now may be the time to consider either initiating or rounding out existing gold positions, as the next move higher may be drawing close.
I will be following up soon with another post taking a closer look at silver (SLV) in the same context.
Disclosure: I am long GLD, SLV.
Disclaimer: This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.
