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Gold Gives a Warning Shot to the Market

Gold's drop earlier this week signals a warning for bulls


Is the gold holocaust over? Better hope so, whoever you are — gold investor or not — because gold is one of the most sensitive “stress gauges” for the global banking and credit system.

Looking back at my gold charts, I was struck (spooked might be a better word) by the Midas metal’s prescience in the summer of 2008. In the second half of July that year, and right through August, the stock market tried to rally on assurances from various government officials that the subprime mortgage crisis was “contained.”

Fed chair Ben Bernanke told Congress on July 16 that mortgage giants Fannie Mae (OTC:FNMA) and Freddie Mac (OTC:FMCC) were “in no danger of failing” (less than two months before both institutions were put into conservatorship).

Gold was buying none of it, though. Starting July 15, the price of gold plunged 20% over the next month, briefly stabilized, then sank again in September as Fannie, Freddie and Lehman Brothers all failed.

The credit crisis was on.

I don’t want to overstate the significance of this precedent. We aren’t in 2008, and investor confidence appears to be a good deal stronger today than it was then.

Still, I think gold’s collapse earlier this week was a warning shot. The stock market can’t keep rising indefinitely on the back of utilities, healthcare and consumer staples. We’ve got to see meaningful participation, soon, from economically sensitive sectors like technology, energy and, yes, mining.

If not, the bull will be in trouble.

Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk “value” approach has won seven “Best Financial Advisory” awards from the Newsletter and Electronic Publishers Foundation.

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