This is exactly the trend a precious metals investor would want to see should equity markets tank in the near to mid-term. Tomorrow we will see the significance of today's late day sell-off in the DOW to a close below the psychological 10,000 level.

Regards - VHF

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Precious Metals Decouple From Dow

August 26, 2010

NEW JERSEY (Commodity Online): Precious metals have now decoupled from the Dow Jones Industrial Index with Dow falling 6.1% from its high on August 9th, along with both gold and silver rising by about 3.3% during the same period.

A year ago we would consistently see precious metals and stock market prices rise and fall in parallel, according to National Inflation Association (NIA).

The Dow Jones to gold ratio is now down to 8.1, near its low for 2010 of 7.9. The gold to silver ratio still remains at a historically high level of 66. However, silver was up today by $0.65 to $19.03 per ounce, its biggest one day gain since early June. We expect silver to significantly outperform gold in the months to come.

One year ago, almost all mainstream economists on CNBC were calling for either a "U" or a "V" shaped economic recovery. NIA said that prices were rising only due to inflation and there would be no economic recovery. NIA went into detail about how destructive government programs like the homebuyers tax credit were helping to artificially boost economic numbers, but as soon as these programs were over, economic activity would collapse to new lows, NIA said in a press statement.

In hindsight NIA was right. "Now that the government has ended its homebuyers tax credit, we just saw sales of previously owned homes decline in July by 25.5% from one year ago, to their lowest level in a decade. We also saw new home sales in July based on the signing of new contracts decline by 32.4% from one year ago."

The government will report their second estimate of second quarter GDP on Friday and we will likely see a revision from growth of 2.4% down to growth of less than 2%. Keep in mind, the White House budget is projecting a GDP growth rate of 5.58% over the next five years (along with permanently low interest rates) in order to get the budget deficit down to $752 billion in 2015. With a sharp contraction in GDP likely coming in the third quarter, NIA continues to believe that the Federal Reserve will unleash the mother of all quantitative easing this fall, along with a huge push by Congress for a new stimulus plan.

U.S. mutual funds currently have about $10.5 trillion in assets, with $2.5 trillion being in bonds and $4.6 trillion being in equities. Although the amount of money invested in equities is still far greater than bonds, asset inflows into bonds have outpaced equities for 30 consecutive months. During these 30 months, $559 billion were invested into bond funds while $209.4 billion were pulled out of equity funds. It is a real shame that most retiring baby boomers who are looking for safety, are actually investing their savings into the riskiest assets of all.

The U.S. savings rate climbed in June to 6.4%, its highest level in one year. It is unfortunate that Americans who are doing the right thing by increasing their savings, are simply giving their savings away for free to the government which is spending it recklessly with no way of paying it back. When this bond bubble begins to burst, prices of commodities will explode to the upside like nothing you have ever seen before.

NIA believes that there is a risk of the bond bubble beginning to burst as early as this fall. Smart money is now loading up on commodities. In the week ended August 17th, net long holdings in futures for 20 commodities rose 2.6% to 1.18 million contracts, with the biggest rises coming in agricultural commodities like wheat and corn. Commodity assets under management gained by about $8 billion in July to over $300 billion.