Tags: Sarin | gold | stocks | Dow

Barclays’ Sarin: Stocks Could Be Next to Drop After Gold Plunge

By Michael Kling   |   Tuesday, 23 Apr 2013 08:06 AM

Following the recent dramatic drop in gold prices, stocks may be next to plunge, warns Dhiren Sarin, chief technical strategist at Barclays, as the plunge in gold prices is a sign that markets have lost faith in central banks’ quantitative easing efforts.

“The breakdown in gold, in euros and U.S. dollars, tells us that some of the belief in quantitative easing measures has faded, and policies by central banks aren’t flowing through to investors,” Sarin told CNBC. “The asset class most vulnerable for a selloff after commodities is likely equities.”

Although gold rebounded somewhat, it fell as low as $1,339 an ounce.

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“The recent dramatic drop coincided with the largest declines seen since 2011 in copper on a weekly basis and the largest decline of the year in the S&P. Thus, we believe it is damaging for risk sentiment,” he said.

Following gold’s plunge, the Dow Jones Industrial Average fell 2.1 percent last week, its worst week so far this year, and European stocks were also down. For example, Germany’s DAX index was the lowest it’s been in four months.

“The move lower in equities is not completely over,” Sarin predicted. “The DAX’s new lows is a bearish signal.

“Over the past 1 ½ years, we have had three big selloffs of 10 percent each. Based on this, we could have up to 7 percent left to go from current levels in an aggressive scenario. In stocks, for the next few months, we are looking to sell bounces.”

Other experts believe the sudden drop in gold prices shows that fears about central banks sparking inflation with quantitative easing have subsided. Gold investors have been buying gold as a hedge against inflation, believing the Federal Reserve and other central banks by pumping liquidity in the economy would ultimately spark high inflation. However, after several years of low rates and QE programs, inflation has yet to rise.

“I think what’s happened is that gold, in the way it’s traded, has transitioned,” Edward Lashinski, director of strategy and trading for the futures group at RBC Capital Markets, told The Wall Street Journal.

“It transitioned from a store of value into what now appears to be a bubble based on expectations of central-bank liquidity measures.”

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

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