There is a dichotomy occurring today. Gold is at record highs. Stocks are jumping. And bonds — well, today’s Treasury auction was oversubscribed.

If this does not have you scratching your head, it should. Because on the surface it does not much sense. So let’s break today’s events down.

Gold traded as high as $1.045 per ounce, a new record. Speculators put new money into the metal after two events weakened the U.S. dollar further.

First, Australia unexpectedly raised interest rates by 25 basis points. The Reserve Bank of Australia opined, “It is now prudent to begin gradually lessening the stimulus provided by monetary policy.”

Second, a rumor spread about secret talks between Russia, China, Japan, France and Gulf States to replace the dollar as the chief currency for oil. These talks were flatly denied, but the rumor is still having an impact.

Stocks are jumping because of both the rally in commodities and optimism about the economic recovery. Several other metals, in addition to gold, are rising. So is oil. The Australian rate action has some traders betting on a stronger-than-thought global recovery.

Some of the gains might also be attributable the covering of short positions initiated last week.

Treasury bonds are off slightly, but there were a lot of buyers at today’s auction. The bid-to-cover ratio, which compares the number of bids to the number of available bonds, was 2.76. This was higher than what we’ve been seeing over the past several auctions and signals that demand for Treasuries remains strong.

It’s pretty easy to draw a correlation between the dollar, gold and stocks. However, if the outlook for the future is so bright, then why did investors compete with each other for the right to lock up their money for 3 years at a yield of 1.445%? (That is what the Treasury notes sold at in today’s auction.)

Clearly, not every investor believes the recovery will be V-shaped.

Today is purely a trading rally ahead of the “official” start of third-quarter earnings season. (Alcoa [AA] reports this afternoon.) We will need a good reaction to profit reports to sustain this rally.

As far what your own portfolio, pay attention to trends in earnings estimates. Several analysts have recently cut their 2009 and 2010 forecasts on Barrick Gold (ABX). Conversely, estimates are rising on some cyclical stocks, such as DuPont (DD). Even Caterpillar (CAT) is seeing upward revisions, though changes have not been enough to move Zacks Consensus Estimates higher.

But since the economic recovery will be slow, also keep an allocation to more conservative holdings. For example, food companies such as General Mills (GIS) and ConAgra Foods (CAG) are also seeing rising earnings estimates. Some large drug stocks are also trading at cheap valuations.

Volatility works both ways, and today it is helping stocks. However, this is just one day, and the movement should not sway your opinion any more than last week’s activity did.
Read the full analyst report on “AA”
Read the full analyst report on “ABX”
Read the full analyst report on “DD”
Read the full analyst report on “CAT”
Read the full analyst report on “GIS”
Read the full analyst report on “CAG”
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