Will Gold Give In to Stock Market Rally?

The yellow metal is on an uptrend move, supported mainly by social unrest in the Middle East and fear of worldwide inflation.

In the past weeks, the democracy domino brought protests in Egypt, Tunisia, Bahrain, Yemen, Iran, and Libya, grabbing world attention and news headlines. The increase in food prices will further agitate the already angry protestors.

To distract the world from beating its own people, Iran takes warships to the Suez Canal to get on Israel’s nerves and affect its confidence in controlling the waterway. Israel’s ally is gone; time to bind with the Egyptian military in power.

The political uncertainty is bullish for precious metals. In the near future, gold is likely to make more gains supported by the momentum behind the rally that started on Jan. 28. Silver is above $30; you may think it is overbought, but renowned investor Jim Rogers says, “The metal is 40% below its all-time high, and going forward, silver is relatively cheap and undervalued.”

Could gold prices, currently trading above $1,400 an ounce, go all the way to make a new high in a nice straight line? Possibly, but there are forces limiting the gains.

Unless you have a lot of money and try to flee from the Middle East, currently stocks are better candidates for your money. Bernanke is proud of pushing up stocks, and he has the crowd and momentum behind him; if there is one thing he likes to achieve, it's to make sure the rally stays intact.

The chart below shows how gold peaked three times when the market fell. Following that, in January money flew away from gold (and other precious metals) to stocks. The question is: With the high-risk appetite in the market, can gold make a new high? Gold or stocks -- which one will run out of fuel first?

Also dampening precious metal investment in the near term is China tightening monetary policies. It raised bank reserve requirements by 50 basis points for the second time this year.

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Rising inflation is real, and Bernanke’s next job is to keep it low at 2-3%. Play with the numbers or raise the interest rates. While raising interest rates makes gold investing more expensive, in the long term, the metal will appreciate as a safe haven asset against devaluating currencies. $1,650 gold by the end of the year will not be a surprise.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.