Traders Are Dumping Stocks and Buying Gold and Silver

A movement fueled by a number of forces such as the EU planning another Greek bailout, the Fed keeping interest rates low and the slow global economic growth. The only safe place to invest is commodities, specifically gold!

Published: Monday, 6 Jun 2011 | 5:19 PM ET
By: John Melloy
Executive Producer, Fast Money

Gold [GCCV1 1543.30 -3.20(-0.21%)] and silver [SICV1 37.075 0.293(+0.8%)] have outperformed the S&P 500 The move is fueled by a number of worries: The European Union is planning its second Greek bailout, the Federal Reserve is angling to keep interest rates low while the second round of quantitative easing runs out—and global economic growth is slowing.

“Gold is more valuable at this juncture as the flight to quality accelerates,” said Stephen Weiss of Short Hills Capital. “Global equity indices will all be in decline as multiple growth engines sputter: US, China, Eurozone and Japan. Only place is commodities, and specifically gold, because that is where perceived safety and momentum will be.”

The SPDR Gold Trust [GLD 150.4899 0.0099(+0.01%)] and the iShares Silver Trust [SLV 36.187 0.477(+1.34%)], the most popular ways for the retail investor to trade these commodities, are both up 4 percent in the last month. The S&P 500 is down 4 percent.

Over the last 80 years, gold has traded, on average, about 1.5 times the S&P 500, but traded as high as six-times the S&P 500 back in 1980 when inflation damaged the value of the dollar, according to John Roque, a technical strategist for WJB Capital. Roque, who like a lot of chart analysts, studies this ratio quite closely, is seeing a bullish breakout in gold.

For the metal to get back to its average price relative to stocks, it would need to increase 23 percent to $1900 from its current level around $1540.

Beyond the money

“Gold is a currency and its re-monetization is accelerating,” said Brian Kelly of Brian Kelly Capital. “Stocks will not perform well in a stagflationary environment. China's next export is inflation, with a slow growth global economy profit margins will get squeezed.”

The S&P 500 [.SPX 1296.12 9.95(+0.77%)] is down more than five percent from its bull market high reached at the beginning of May as a string of poor economic reports— culminating in the disaster jobs report last Friday—created uncertainty about what the Fed’s next bullet will be to keep liquidity in the system.

Any action may be gold bullish as it increases the Fed balance sheet and weakens the dollar. Any inaction may also be gold bullish as it increases the need for a flight to safety for investors.

“The government has no more bullets,” said David Greenberg of Greenberg Capital and commodities trading veteran from the pits. “Gold is the only asset that has held value over time.”

So right now, many traders are choosing gold as a refuge over stocks. But one trader does see a third choice: sell them both. Gold may come under pressure as hedge funds sell it to raise money to cover their stock losses.

“Gold needs stable stock market to continue to appreciate,” said Joe Terranova of Virtus Investment Partners. The ‘Fast Money’ trader sees the S&P 500 dropping to 1029 and gold falling to $1300.

© 2011

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