October 2011 – Gold and Stocks

Both the price of gold and stocks have been trading in a fairly narrow range lately.  Gold has been in the $1,600  to $1,700 range since its big fall from the all-time highs above $1,900.  Meanwhile, just as it looks like stocks are headed way up or way down, they reverse and go the other way.

The Dow has been between 10,000 and 12,000 for a while now.  But the remarkable thing is that this range has been maintained with huge volatility.  That is a big range for sure, but it isn’t when you consider that a 300 or 400 point move in one day is not really considered big news anymore because it is happening so frequently.

The other interesting thing right now is the relationship between gold and stocks.  They seem to be somewhat correlated right now.  We have seen this in the past, but then the correlation broke off for a while.  The correlation will probably break again, but it is hard to say if it will be in weeks or in months.

The biggest threat to the gold price right now is the fear of another recession.  I am still bullish on gold in the longer term because of the economic mess that DC has created, but the near term is very hard to predict at this time.

I am in safety mode and I suggest the same to everyone else.  You should have at least half, but probably most, of your investments in a setup like the permanent portfolio as described by Harry Browne.  For speculation, I would add a little bit in the way of gold related investments and a very small short position in stocks.  Also, it wouldn’t hurt to increase your cash position slightly above the recommended 25%.

Again, we should be in safety mode.  We just need to protect the money we have right now and wait for the opportunities.  If you feel your position in gold and gold related investments is low right now, this is a good time to buy.  The price may go lower, but why wait?  You would be better off buying now in the $1,600 range than you would have been buying a month ago above $1,900.