From Jeff Clark, Editor, Jeff Clark’s Market Minute:
The relationship between gold and the S&P 500 is more lopsided now than at any time over the past decade.
Take a look at this ratio chart, which shows the price of the S&P 500 divided by the price of gold over the past 10 years…
The average level on this chart is about 1.20. In other words, it takes about 1.2 ounces of gold, on average, to buy one “share” of the S&P 500.
When the ratio is below a range of 1.2-1, it indicates that stocks are cheap relative to gold. When the ratio is above the range of 1-1.2, gold is cheap relative to stocks.
And it’s at the extreme levels where investors can find opportunity.
For example, back in August of 2011, when gold was trading for $1,800 per ounce, this ratio chart was at an extremely low level of 0.6. Stocks were cheap relative to gold, or – to put it the other way – gold was expensive relative to stocks.
The ratio was at just half of its normal level. In order to get back to “normal,” either stocks had to rally or gold had to sell off… or some combination of the two.
Indeed, buying stocks and selling gold in August of 2011 proved to be a highly profitable strategy.
Now, let’s look at today’s situation…
This ratio chart closed Tuesday at 2.29. That means it takes 2.29 ounces of gold to buy one share of the S&P 500. That’s nearly twice the normal level, and it represents an extreme condition.
In order to get back to normal, either stocks need to sell off or gold has to rally, or some combination of the two needs to occur. Granted, we could have made that argument anytime over the past few months. And nothing’s happened yet.
But we have just entered a seasonally strong period for gold (the metal tends to rally from July into September). And we’re approaching a seasonally weak period for stocks (August and September are two of the worst months of the year for the stock market). So, now looks like as good a time as any to start anticipating a reversal of the current trend where stocks ramp higher as gold sells off.
Of course, this extreme condition isn’t going to unwind itself in just a couple of months. But even a slight move towards a “normal” level could produce a solid rally for gold, and general weakness in the broad stock market between now and September.
Best regards and good trading,