The price of gold and gold mining stocks soared today as stocks continued this week’s selloff. Our preferred investment vehicle for gold, the SPDR Gold Trust (symbol GLD), which holds gold bullion, rose 2.4% today as spot gold closed at $980 per ounce. We also hold shares in gold mining companies through the Market Vectors Gold Miners ETF (symbol GDX), which soared nearly 10% today. Silver also enjoyed a strong day, rising over 3% to close just over $15. The price action was accompanied by heavy trading volume, suggesting the precious metals are attempting to break out of the year long trading range. Our near term target for gold is $1,000 per ounce, a level gold has struggled to surpass many times over the past 18 months.

What is behind today’s move in the precious metals? It appears that investors are reducing risk as we move into a seasonally treacherous time for stocks. As we noted last week, stocks have started to react less enthusiastically to good economic news. Tuesday’s broad stock selloff of 3% from the morning highs came after the ISM Manufacturing Index showed the manufacturing sector in August grew for the first time in 19 months. One would normally expect investors to cheer such news, but the selloff suggests the 50% rally from the March lows is exhausting itself. And it’s not just stocks that have been weak of late, but also the commodity complex with the exception of gold and silver.
Stock market selloffs over the past three months have been extremely brief as investors saw the weakness as a buying opportunity. The high volume to the downside yesterday may mean this nascent correction has more to go, but the S&P 500 should find strong support around the 950 level, where the latest rally began. In any event, Friday’s employment report for August should provide good clues for the market’s direction.


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