Gold and stocks have been buddies lately. When gold goes up, the S&P 500 goes up. When gold goes down (like today), the S&P 500 goes down. It’s been this way for one year. This is not the norm. Gold’s biggest bull forces are a flight to safety or hyperinflation, two conditions that are not friendly for equities.
Thursday, gold closed at $1,229 per troy ounce, while the S&P 500 finished at 1157. This puts the gold-to-stocks ratio, a measure used by many technical analysts, at just 1.1. This nearly perfect correlation is a rarity, occurring only a few times going way back to 1928. Something’s gotta give.
“Prior bull cycles for gold peaked relative to the S&P 500 at three times, 4.5 times and even six times in 1980,” said John Roque, technical analyst for WJB Capital Group and provider of this historic analysis. “We think gold on a relative basis still has a long way to go.”
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Or unfortunately, the S&P 500 has a long way to go down. A stock sell-off intensified today on concern a bailout organized by the European Union and the IMF could fall apart, leaving a key area for the global growth engine in limbo and pounding the Euro currency.
Jason Trennert, chief stock strategist for Strategas Research Partners, held an informal survey of institutional money managers at New York’s famous ‘21’ Club last night. The investors were lining up as straight as the restaurant’s famous exterior jockeys about gold.
“Investor attitudes towards gold remain strong,” said Trennert, also founder of this up-and-coming research firm. His survey found 75 percent of money managers believe gold will get to ‘1,500’ first, before the S&P 500. The average 12-month target of the investors on gold was $1,452, or an 18 percent gain from here.
Besides the metal itself, WJB’s Roque recommends buying Newmont Mining to play the gold-S&P 500 break-up.
With reporting by Jennifer Dwork.
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