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Why is gold, as measured by the AMEX Gold Bugs Index (HUI) ramping at the same time that tech is up with little inflation? Is it possible for both to move in tandem?
Not only is it possible for technology and gold stocks to move in tandem, but they do so frequently.
The HUI, the index of gold mining stocks whose production is not hedged for longer than 18 months, rises and falls in anticipation of:
1. expected inflation exceeding the short-term interest rate cost of carry, and
2. the dollar weakening.
Technology stocks rise and fall on other factors, including expected profitability of the sector. Nothing precludes rising inflation and/or a weaker dollar from hampering the corporate capital budgets so critical for technology profits.
Tech stocks and the HUI rose together in 2003, fell together in mid-2004 and recently have been rising together again. This combination indicates to me that we are likely to have decent growth and tech profits along with short-term interest rates at or below expected inflation.
When people look back at what surely will be remembered as The Conundrum Decade, this will produce scarcely a ripple.
Howard L. Simons is president of Simons Research, a strategist for Bianco Research, a trading consultant and the author of
The Dynamic Option Selection System. Under no circumstances does the information in this column represent a recommendation to buy or sell securities. While Simons cannot provide investment advice or recommendations, he appreciates your feedback;
to send him an email.
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