Stocks Vs Gold

There exist an inverse relation between the global stock markets and the price of gold. Gold is regarded as a safe heaven asset class for investing and thus when people foresee a bleak future for the stocks, they hold on to gold to safeguard their investments.

Thus when markets fall, gold prices rise and vice versa. But presently this relationship is not holding true. Over the last few days when the global stock markets have given a significant up move the price of gold have not fallen by even half of that extent. This signifies that people are still buying gold which is a clear indication that the fear of a market crash is still in their mind.

Since 22nd April 2009, when he Nifty 50 Index have moved up by over 10% from a level of around 3330 to to current levels of around 3680, the gold prices on MCX (which is primarily driven by the Global Gold prices) have also risen by around 1% ( despite a appreciation in currency). This clearly shows that the risk aversion is still there.

One of the articles in Economist's last week issue is worth mentioning in this regard related to over optimism and scepticism. Its broad idea was that-

"The worst thing for the world economy would be to assume the worst is over".

t says that this new extreme optimism contains two traps, one obvious, the other more subtle. "The obvious trap is that confidence proves misplaced—that the glimmers of hope are misinterpreted as the beginnings of a strong recovery when all they really show is that the rate of decline is slowing. The subtler trap, particularly for politicians, is that confidence and better news create ruinous complacency. Optimism is one thing, but hubris that the world economy is returning to normal could hinder recovery and block policies to protect against a further plunge into the depths"

The crux I could make out of that article was that the worst is not yet over now, only the rate at which we reach the worst has slowed down.

Thus my view is to be cautious and then execute your trades rather than being complacent.