(Kitco News) - Gold’s rally to record highs has grabbed all the headlines, but stock indexes have put in a sharp rally in September and that’s begun to raise a few eyebrows as these two markets normally trade in opposite directions.

In fact, stock indexes and most commodities have been marching in lock-step this month and that has some market watchers wondering whether or not this is sustainable. During the month of September, S&Ps have been up about 11%, while gold has been up about 2%. The Federal Reserve’s decision to focus on fighting deflation and keep the policy of easy money will help markets in general, but it’s likely commodity markets – with gold ranked number 1 – will continue to rise.

Robin Bhar, senior metals analyst with Credit Agricole CIB, said while it is unusual for all of these markets to rise at the same time, the current global economic environment itself is unusual. “It’s a ‘Brave New World’ as Aldous Huxley wrote many years past,” he said, adding some of the traditional views toward markets, such as rationality, no longer hold.

He suggested investors are looking to get as diverse as possible in order to minimize pain. It’s about principal preservation now more than anything else.  “The days of getting a real return of 5%, after inflation, are history now,” he said.

Once there’s a better sense of stabilization in the economy, and fears of a double-dip U.S. recession past, investors might become more discriminate in their choices, he said.

Some equity analysts point to buying companies with solid earnings and lots of cash on hand – and many of those companies are commodity-related firms.

With nervousness still a big factor in the markets, gold continues to benefit, even though it has no return, pays no dividend or coupon, Bhar said. Considering that fixed-income yields are paying next to nothing, there’s less of a concern of opportunity cost.

The Federal Reserve’s statement on Tuesday was dollar-bearish and that will help commodities as they are denominated in dollars, with stocks supported to a certain extent. Dennis Gartman, publisher of the eponymous The Gartman Letter, said the markets likely to benefit most from the Fed’s actions are gold, copper, grains, debt securities and then stocks.

He said the rally in share prices keeps him from being outright bullish on stocks. “Had it not been for the (rally), we might actually be quite aggressive in buying shares here in the U.S. today but precisely because of that fact we shall refrain from doing so in the funds we manage… If the Fed is offering liquidity, we clearly should accept that fact and trade bullishly as a result. We, however, shall be more comfortable trading commodities bullishly and so we shall focus our attention there instead,” he wrote in Wednesday’s newsletter.

Frank Lesh, futures analyst at FuturePath Trading, said if any market is vulnerable to a pullback, it’s more likely to happen to stocks than gold, which he thinks will continue to move higher overall. The rally in stocks is likely to stall at this week’s highs around 1140 for the December CME S&P 500 contract, but he also doesn’t see a sharp break for equities.

“We had priced in more dire economic times, but it’s not as bad as we expected, so we’ve rallied a bit. But the words from the Fed, about sluggish growth, have stopped the rally for the time being,” he said.

Spencer Patton, president and founder of Steel Vine Investments, said stocks are at “full valuation” right now and could be ripe for a pullback given the rally, but sees support at 1060-1080 for the S&Ps. He said by the year’s end, stocks could be up 10% for 2010 if they can close convincingly above resistance at the 1140 region, around this week’s highs. He’s much more bullish on gold and commodities in general.

Although the Fed said it is focused on fighting deflation, Patton said this viewpoint will ultimately lead to a highly inflationary environment which is bullish for resources. He said deflation is really only seen in U.S. housing – inflation is being seen in areas like rent prices and food commodities. Once the economy improves, he said, it will be difficult for the Fed to stay on top of the inflation monster.

Patton also said that gold prices could become more volatile in the days and weeks to come, and could trade like coffee, which has seen 10% swings in a day. He said gold could reach $1,300 an ounce as soon as this week and sees gold “well above $1,300” by year’s end, perhaps at $1,350.

Lesh said while he is bullish on gold, pinning his next targets at $1,308 and $1,366 for the December gold futures, he believes the jumps the yellow metal have experienced are a bit much. “It’s getting frothy up here. I was impressed that we were making little movements higher, but now volatility has increased. You can’t rule out a correction. We have had corrections of $100 in gold – and gold will do that,” he said. He puts support for gold at $1,277 and $1,230.

Concerns about inflation have bubbled under the surface in the commodities markets for some time now, but some analysts believe it’s hard to expect massive inflation considering the valuation of some commodities.

John Kleist, analyst at Allendale Inc., points to the grain markets as one example that people cite as proof of inflation. “If corn prices were at $3 (a bushel) I would believe it, but at (nearly $5) it’s a tough shoe to eat,” he said. With the economy still fragile, it’s difficult to push prices higher. He said the cattle market is a prime example of falling under the weight of lower demand for a higher-priced commodity. “People don’t want to pay $10 for a steak,” he said.

By Debbie Carlson of Kitco News dcarlson@kitco.com

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