Hot Sectors and Bad News: Don’t Cheer for Gold If You Want a Bull Market Back

By Lynn Carpenter

Once again gold is on the stock market’s center stage, and that should catch your attention whether you love it, hate it, or don’t normally care about gold at all.

Maybe you want to give it the hook. If you have a hefty portfolio of stocks, especially if most are in sectors other than precious metals, you should pray the yellow metal down from its heights as it reaches toward $1,000 again.

I have nothing against gold, per se. Rising Tide even has an outstanding gold mining business in its portfolio. And though I am not with the “gold should be money” gang, I surely do like it dangling from my ears.  But when gold is hot, the market is cold.

Let’s skip the shoulda-woulda’s and deal in facts: People do not buy gold for investment when they believe other things are going well and are enthusiastic about the prospects. And the stock market runs on what people believe about future earnings and corporate and economic performance. None of which applies to a lump of gold.

While many people strongly believe gold should be money, well, as grandma used to say, “if wishes were horses, then beggars would ride.”

Gold is not money. Not these days. Not even Switzerland backs its currency with gold anymore. Gold is a metal that, excepting the Third World (now politically correctly known as developing countries) and possibly Colombian drug runners, is never passed from pocket to pocket in exchange for groceries, rent or car payments. So people who are buying gold are not motivated by the same reason as people who buy spendable and freely exchangeable yens, euros or other currencies. People buy gold because they think that if the whole world falls apart and anarchy rules, they will have something to spend in an emergency.

That is totally at odds with stock market investing, where we buy shares of companies that we expect to prosper in good times and hold up decent growth and earnings in bad times.

What’s more, gold—the metal itself—is an extraordinarily docile asset. It is not a business. It cannot grow its earnings. It cannot change its marketing plan or develop something better than an iPod. It cannot increase its dividend or lay off workers. It can only wait for other things to go wrong enough to worry people into cleaving to its side. Falling in love with gold is like falling in love with your life insurance policy. Do you really, really want to cash that in? 

On top of this, gold costs you money to store it, assay it to prove it’s real and unadulterated, and trade it. Dealers in portable coins take a good clip from you on every turn. Today’s steep ascent in gold is a reflection of our despair over the market.

But this may be a good sign after all.  Business Week just declared a 2008 second-half rally dead. Opinions aren’t much better than that anywhere else. There is very little in the news to suggest a rally is coming or a reason why there should be one.

And that should make you suspicious. Such uniform gloom is apt to come just before things turn around. A month ago, I told my subscribers that I expected the bear market to end in the next year to 18 months—meaning the long secular bear market that we’ve been in since 2001. But the immediate bear leg may be ending even sooner.

If that’s the case, better grab your bargains while you can.

But as I’ve said before, don’t look for the usual leaders. This time, financials won’t be in the vanguard. To me, the best sign for hope at the moment is the recent strength in biotechs. We’ll come to the gloom in the Market Watch section.

Oh—one other note before I go on to the Market Watch. After some gentle prodding, I finally got busy on my IDE blog. It’s not always about investments, but random musings, often personal, and I post each day. Check it out. Andy C. is also posting daily and makes a good read with his global/Asian perspective.

Lynn Carpenter  

P.S.  To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

[Ed. Note: For more companies that can protect and grow your wealth, check out Lynn Carpenter's Rising Tide Letter. She recommends companies that consistently deliver outstanding results. Click here for more info.]