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Gold and the S&P 500 Index have generally had a strong correlation since early 2008, with the glaring exception being the second half of 2011. This relationship can be seen on the chart below (S&P 500 Index in blue; gold in yellow).
Just like in the latter half of 2011, gold has been diverging from the S&P for the last month. This can be seen in this next chart, which showcases (to the right of the vertical white line) the recent divergent nature of the two. So what's up with gold? Has it decoupled from its risk-asset correlation with the S&P 500? Is everything okay now, making gold no longer needed as a hedge against uncertainty, or currency devaluation?
Some are suggesting that investors believe gold's safe haven status is no longer needed, and that stocks are the place to be in a world in which an economic dark cloud is dispersing. I'll instead offer a rather simple possible answer – maybe gold is merely washing out some weak longs as it tests long-term support.
Notice in the chart below how gold is testing the 100-week moving average, which is the purple moving average line. The 100-week moving average has been stone wall support for gold, being tested consistently this year, and at other times since 2002. In fact, since 2002, gold has only traded below the average once, and that was for a brief period during 2008.
Maybe the run for gold is over; or maybe a larger correction is coming. On the other hand, it could be that gold's correction is nearly complete. Whichever the case, I thought I would highlight a previously solid support level for gold.
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© 2012, Dominic Cimino of Preferred Planning Concepts, LLC (You can explore the services offered by Preferred Planning Concepts by viewing us on our website at www.ppcplanning.com) Any redistribution, reprinting, or reference to this chart or content is allowed so long as reference to the author and source is acknowledged.
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