WHY GOLD AND THE DOLLAR CAN RALLY TOGETHER -- NEWMONT LEADS GOLD MINERS ETF TO STRONG GAIN -- INTERMARKET RELATIONSHIPS MAKE SENSE -- WHY INVERSE ETFS AREN'T GOOD LONG-TERM HOLDINGS

GOLD IS COMPETING WITH THE DOLLAR... Some readers have asked why gold can continue to rise in the face of a rising dollar. As I've explained several times recently, gold is both a commodity and a currency. At the moment, it's acting more like a currency than a commodity. With the Euro remaining under pressure, money coming out of that currency has to go somewhere. Some of it has been going into gold. Chart 1 shows gold hitting a record high against the Euro (it's doing the same versus the British Pound and Swiss Franc). The next biggest currency is the yen. Chart 2, however, shows gold also hitting a new record against the yen. Both of those currencies are among the weakest in the world. But gold has also hit a record against the Aussie Dollar, which was been one of the strongest currencies. That leaves the Canadian and U.S. Dollars to compete with gold. And both are losing. Chart 3 shows gold hitting a six-month high versus the CDW. Chart 4 shows gold testing its fourth quarter high in terms of the U.S. Dollar. It is true that gold and the dollar usually trend in opposite directions. But that's when gold is acting like a commodity. Since April, bullion has been acting as the world's new currency of choice. Gold is also benefiting from safe haven buying caused by the recent spike in volatility in global stocks. So are gold stocks.

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NEWMONT LEADS GOLD MINERS HIGHER... I've written several bullish articles on gold stocks, and today is no exception. Chart 5 shows the Market Vectors Gold Miners ETF (GDX) climbing more than 5% to a new 2010 high. Its relative strength ratio (below chart) is rising as well. One of the biggest reasons is Newmont Mining, which I've featured several times in previous articles as a gold mining leader. Chart 6 shows NEM breaking through its fourth quarter high (on April 29 I showed NEM also breaking a four-year resistance line). When it comes to gold stocks, I prefer bigger ones (because of better liquidity). Newmont is the third biggest holding in the GDX. The second biggest is Goldcorp which is also breaking through its fourth quarter high (Chart 7). The biggest holding in the GDX is Barrick Gold. Chart 8 shows that stock trading at the highest level in six months. Gold stocks are the day's strongest stock market group. That's not unusual when investors start worrying that other investment choices (including currences) are too risky.

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INTERMARKET TRENDS MAKE SENSE... One of our readers expressed puzzlement about the recent relationship between bonds, stocks, and commodities -- and asked why bonds, for example, were now moving in the same direction as stocks. Actually, some are and some aren't. Let's deal with stocks and commodities first. Chart 9 shows stocks (black line) and commodities (red line) trending in the same direction over the last year. Both bottomed last spring and have rallied since then on hopes for a global recovery. Commodities have lagged behind stocks over the last few months, but have generally been rising and falling with stocks each day (except for gold). When referring to bonds, we have to make a distinction. Corporate bonds have been closely tied to stocks over the last year. That's especially true of high yield corporates (blue line). Investors buy corporate bonds (and stocks) when they're optimistic on the economy. They sell both when they're not. That's why corporate bonds and stocks have been rising and falling together over the past week. Treasury bonds (green line) are exactly the opposite. They've been trending in the opposite direction of corporate bonds, stocks, and commodities over the last year. That's why Treasuries jumped last week when stocks, corporate bonds, and economically-sensitive commodities dropped. If you break down the fixed income group into different bond categories, recent intermarket moves make a lot more sense.

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WHY INVERSE ETFS AREN'T GOOD LONG TERM HOLDINGS ... Whenever I recommend inverse (bear) ETFS as a hedge against a possible market correction, I add the caveat that bear funds are not meant to be long-term holdings. One reader challenged that view, and pointed out that someone who had bought an inverse fund in October 2007 and sold it in February 2009 would have made a fortune. True enough. But if that same investor had held onto to that bear fund from March 2009 to March 2010, he would have lost most of that fortune. Inverse funds only work during a bear market and during corrections in bull markets. They don't work in a rising market. Since markets have spent at least as much time rising as falling over the last decade (and more time rising historically), inverse funds aren't suitable as a long-term holding. Chart 10 shows why that's true in the case of the ProShares UltraShort QQQ (QID). The bear fund rose from October 07 to November 08 as the Nasdaq 100 fell. It lost all of that and more after that. While this inverse fund was a good holding during 2008, it was a big loser during 2009. To me, a long-term holding is something you buy and hold for years. With an inverse fund, you don't hold it. You have to trade in and out of it.

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