It is well know that the global economy, Europe in particular, is weaker than what many economists expected at the beginning of the year.
The question here is: Will the gold market signal trouble in the equity markets?
Here is what the relationship has been between the gold market and the European equitymarkets (as measured by the NASDAQ Euro Index) since 2000.
Unsurprisingly, it is difficult to decipher a general pattern.
The next charts take a closer look.
The following figure inspects the relationship between the price of gold and the performance of European equities for the 2007 to 2009 period.
As shown by the gray oval, the gold market started rising around the mid of August 2007. European equities went through some minor strength and weakness periods from mid-August 2007 to its peaking day - October 31, 2007.
Was the two month lead time gold provided investors in 2007 similar to what the goldmarket was predicting prior to the 2011 weakness?
The second chart on the following page has this look.
As shown in the previous figure, the answer to the question of whether gold signaled equitymarket trouble in 2011 is yes.
Gold signaled equity market trouble in early July 2011. Interestingly, the strong slide for European equities began almost simultaneously with the appreciation in the price of gold.
What is the takeaway from this discussion?
If we are entering another bear market, we will likely get a signal from the gold market.
What has gold indicated in 2014 so far?
Well, around the first of June, gold accurately predicted weakness in European equities.
Interestingly, the recent weakness in gold has coincided with weakness in equities.
This may be due to a number of factors, but one thing that would be quite surprising is if the co-movement relationship continues.
With gold approaching a technical low, it may be signaling coming weakness in the European stock markets.
