Smart Investing Daily: Price Of Gold And The Dow Are Both Up? Run!

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On Tuesday, I showed you a Dow Jones Industrial Average chart

. I noted that the Dow has seen three dips to the 11,000 level in the past few weeks, and that the index has struggled to climb above 11,200.

Then yesterday, on the back of higher-than-expected economic news (unemployment may fall) and a hopeful turn of events in Europe (the central bank may buy bonds from European nations, and Portugal's bond auction exceeded expectations), the Dow Jones Industrial Average shot up more than 250 points.

This jump erased the losses the index has seen over the past couple weeks.

Jared mentioned Home Depot (HD:NYSE) in his article on Monday, and yesterday it rose some 4.5%!

But in just over a week, some of you will be joining Sandy Franks, our executive publisher, and me for our launch of Barbarians of Wealth: Protecting Yourself from Today's Financial Attilas, our latest book published by John Wiley & Sons.

In it, we detail how ruthless modern-day financial barbarians are stealing your prosperity... and how to protect yourself from them. This climb in the financial markets just might be another time to do just that.

I have to say, I mistrust this massive jump in the Dow Jones Industrial Average... Why?

Because the price of gold is still up near $1,390 an ounce.

Remember on Tuesday when I told you that one of the reasons why the financial market was down on Monday was because the falling euro boosted the value of the U.S. dollar?

Well, just the opposite was happening yesterday. Portugal's bond auction of 500 million euros' worth of one-year bonds was two and a half times oversubscribed, according to the BBC. The country's prime minister, Jose Socrates, said the Portuguese economy does not need a bailout.

The interest in the country's bonds may prove him right. In the meantime, however, the euro had an upswing... up more than 1.25 cents against the U.S. dollar late in the day.

That means the dollar didn't have a very good day, and gold prices are hovering a couple bucks shy of $1,400 an ounce.

One day isn't enough to cast a pall over yesterday's financial market upswing. Take a look at this:

This is the Dow Jones Industrial Average compared to the SPDR Gold Shares ETF (GLD:NYSE).This divergence could spell trouble.

Over the past week and a half, the price of gold has been climbing as the Dow Jones Industrial Average has been seesawing back and forth. While the Dow has had three tests of its 11,000 level since Nov. 15, gold has dropped below $1,330 just once.

Gold could certainly be trending higher. Even Goldman Sachs is calling for the price of gold at $1,750 an ounce in 2012.

And that makes me mistrust this move in the Dow Jones Industrial Average.

(Investing doesn't have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy simplify the stock market for you with our easy-to-understand investment articles.)

Additionally, the zigzagging looks remarkably similar to the top back in late April. The Dow Jones Industrial Average fell nearly 800 points in about a week back then. And what did the price of gold do? It climbed, and climbed, and climbed... all the way through June when the Dow was trading below 10,000.

To be bullish on stocks now means you have to have a safety net. That means hedging your bets. Buying puts on your stock investments or holding precious metals, like gold, in your portfolio are just a couple ways of hedging.

Another part of your safety net is to really do your homework on each financial investment. This move in the Dow Jones Industrial Average is great and welcome news, especially with the potential drop in unemployment behind it.

But getting caught up in the exuberance can weigh you down with shaky, underperforming stocks when the financial market turns.

That's just when you need liquidity and flexibility the most. Due diligence will help you chose an investment that will not only make you money in upswings, but limit your losses should the financial market turn against you.

I live with a bunch of dogs. In fact, as I write, my Chihuahua, Jove, is sitting on my lap, keeping me company. He's about 4 pounds, but thinks he's much bigger. One of his favorite toys is a huge squeaky goldfish. It's more than half his size, but it's this toy he wants to play fetch with.

Here's the thing. This toy is so heavy that he drops it farther and farther away from me because he gets so tired.

The same thing can be said of investors carrying around "heavy" stocks, or unhedged positions in a market downturn... you slide farther and farther away from your goal.

Keep this in mind the next time you see a 250-point up-day, or a stock gain 15% in a single day.

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by: Sara Nunnally

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