Gold is an asset that some people love to hate. Intelligent investors, however, should keep an open mind toward the shiny metal and the message it conveys.
Since gold was floated in 1970, it has exhibited a low (and often inverse) correlation with common stocks. Remarkably, both assets have been supported by a 6.7% rising slope. Yet their ascending paths are almost a mirror image, with equities outperforming during secular bull markets and gold outperforming during secular bear markets. Why should this be?
At a most rudimentary level, equities are residual claims in the capital structure. Gold, on the other hand, expresses confidence in the financial system. Confidence in banks, currencies, governments and Wall Street seems necessary for a secular bull market in junior claims – i.e. common stocks – to occur.
The behavior of gold, then, helps confirm the stock market’s secular trend. A sustained move in the S&P 500 above its 13-year range, corroborated by a sustained downturn in the dollar price of gold, would suggest the beginning of a new secular bull market.
Despite the steady flow of troubling news from around the globe, it’s possible that structural problems in the financial sector are largely behind us. Further relative-strength in bank stocks would support this case.
© Charter Trust Company