By Sara Nunnally, Editor, Smart Investing Daily, TaipanPublishingGroup.com
A week ago, I warned you that when both the stock market and gold price are up, you’d better be cautious in buying.
I said:
To be bullish on stocks now means you have to have a safety net. That means hedging your bets. Buying puts on your stock investments or holding precious metals, like gold, in your portfolio are just a couple ways of hedging.
Another part of your safety net is to really do your homework on each investment. This move in the Dow is great and welcome news, especially with the potential drop in unemployment behind it.
But getting caught up in the exuberance can weigh you down with shaky, underperforming stocks when the market turns.
Then, the Dow Jones Industrial Average closed at 11,362. Gold futures closed at $1,388.50.
But since then, the Dow Jones Industrial Average has hit a high of 11,507 and gold prices topped $1,431 an ounce. This surge higher didn’t last though, and both the Dow Jones Industrial Average and gold prices took a tumble earlier in the week. Gold closed back down at $1,382 and the Dow Jones Industrial Average was back at 11,372, barely 10 points higher than a week ago.
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Well, there’s a huge battle going on for the direction of the markets. We’ve seen some major developments on two fronts: Federal Reserve Chairman Ben Bernanke came out and said the economy was not yet able to sustain growth without the help of government intervention and President Obama announced a deal to extend the Bush tax cuts for another two years and an extension of unemployment benefits.
The financial market has been seesawing back and forth — sometimes running from green to red to green in a single day.
That’s why we haven’t gotten anywhere in a week.
(By the way, investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy simplify the market with our easy-to-understand articles.)
On the other hand, the U.S. dollar has shown some strength against certain currencies, like the euro, and jumped slightly yesterday against a basket of currencies. That’s helped to rein in gold prices a bit, as the precious metal looked like it was going to take off Friday and into Monday.
I still think the bulls need to be a bit cautious. There are so many changes happening, and investors are just reacting to everything.
Even a CNBC article on Wednesday couldn’t pin down a reason for so much market fluctuation. The problem is that there are many reasons, all converging at the same time.
Federal Reserve commentary, tax changes, bond buying, retail worries and jubilation, dollar movement, hedge fund buying, you name it — it’s all happening now.
Here’s a chart comparing U.S. dollar futures for the two over the past six months.
Here’s the key thing: As the U.S. dollar bounced back in November, gold prices also trended higher. This could be because the U.S. dollar only looked stronger against a flailing euro, and gold was actually responding to economic forces.
The dollar’s peak in December may now represent a strong resistance point that the greenback will struggle to breach.
We may see the dollar test that point, which will push gold prices lower — perhaps into the low $1,370s — at which point I think gold is a buy. That’s also a key level for gold to find support, and I’m expecting a bounce from there.
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We could see the Dow dip on a stronger U.S. dollar, too. Watch for a drop to just above 11,200 in order for support to be tested. This could coincide with gold dropping into the low $1,370s.
From there, the Dow needs to gain some upward momentum or risk falling back into the slippery territory of 11,000.
That definitely means the bulls out there need to be hedging their bets.
About the Author
Sara is Co-Editor of Smart Investing Daily. As Senior Research Director and global correspondent, Sara Nunnally’s diverse resume includes studies in art history, computer science and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, and CNBC’s Squawk Box, as well as numerous radio shows around the country.
As Senior Research Director, global correspondent and co-editor of Smart Investing Daily, Sara has traveled all over the world in search of the best investment opportunities to recommend to her readers, be they in developed economies like France and Italy, in emerging markets like the Czech Republic and Poland, or in frontier terrain like Vietnam and Morocco. Her unique “holistic” approach of boots-on-the-ground research has given her an edge in today’s financial marketplace as she searches for the next investment opportunities in hot sectors like alternative energy, currency markets and commodities.