SP and Gold

As you can see from the chart above even if the S and P declines another 50 points in the next few days the market is hardly in trouble. Yet...

It doesn't take a genius to understand that it's been floating higher on a sea of liquidity courtesy of the Federal Reserve Bank of the United States of America.

On top of which 70 percent of the very low volume can be attributed to high speed trading. What's that? Well, every time you place a trade through your Merril Lynch broker, the Merril Lynch trading desk front runs your trade, by buying the stock then selling to you at a profit. But, that's not all, folks. Every time Merril Lynch trading desk places a trade, the Goldman Sachs trading desk's super computer front runs the Merril Lynch computer, buys the stock, sells it to Merril at a profit and Merrill sells it to you.

Everyone's a winner. Right? Right, as long as the market floats higher.

But what happens June 30th when the Fed wraps up its mega-liquidity program through which it gives money to the banks to invest in risk assets (by pretending to buy treasuries which they are actually selling to themself through the banks)?

It doesn't take a genius to see that without liquidity of the banks, who are pretty much the only players in the market, the market will have trouble floating anywhere but down.

So then, what happens to gold - and silver?

Over the past two years gold and silver have moved pretty well in tandem with the markets. So they'll decline, right?

Maybe. In fact, probably, at first. But all correlations work until they don't work anymore. This correlation has been working because gold and silver have been lumped in with risk assets and all risk assets rise on a sea of liquidity.

But Gold must be distinguished from other risk assets. Because in an environment where debt poses the ultimate risk to the stability of the entire financial system, gold is the ultimate safety play.

Silver- not so much. But over time gold always drags silver with it. And make no mistake, whatever happens in the very short run when the market collapses, gold will decouple from the risk asset basket, and head ever higher until the debt problem is resolved.

So take any short term drop as a god send and load up for the next leg up.