Signal of market correction as gold passes $1,000?
Gold is a hedge, or at least that is what economists say. It is an investment that protects against inflation because it is in limited supply and is a hard asset that holds its value, even if rising prices erode consumer and business spending power.
It is also a hedge against a falling stock market. Stocks may fall 30 percent in value, but the long-term value of gold should be much more steady.So, if gold futures trade over $1,000, why is the market still so high? The answer is probably that more and more people are betting that stocks cannot stay where they are and a major correction is in store.
There are several reasons equities could drop, led by consumer spending weakness and a likelihood that corporate earnings cannot continue to grow unless revenue at big public companies starts to go up quickly. Those problems could be countered by increased productivity in America due to low labor costs and sharp improvement in the GDP of U.S. trade partners like China. Such improvements should drive up demand for U.S. exports.
The single most significant argument against the appreciation in the value of gold is that, despite skepticism, the market continues to rally, and it may take only a modest improvement in American GDP to keep stock prices moving up. Stocks have moved sharply higher since March, but the DJIA still trades below 10,000, which is well shy of 14,000 where it was less than two years ago.
Gold may be a safe haven, but "safe" may not be the place to put money. The old adage is that "Wall Street climbs a wall of worry." There is still a lot to worry about in the current economy, but stocks keep going up.
Douglas A. McIntyre is an editor at 24/7 Wall St.