Gold Likely to Cede Leadership to Equities Into 2012
Expect gold to further weaken relative to stocks as QE3 bets come off the table and a reflationary environment persists.
-- Enoch Powell
I've noted numerous times in my writings since September when I first argued for a breakdown in gold prices that I believed equities would outperform gold this time around. I remember getting a lot of pushback from radio hosts interviewing me who were unable to make the distinction between trend following and mean reversion. Gold has been a stellar performer relative to equities for over a decade now. Mean reversion dictates that at some point the opposite will occur with equities outperforming gold. That does not mean that gold prices go down within the context of the 2012 reflation theme I keep stressing, but rather that they likely would not participate as much as stocks on the upside.
This has shown to be true so far. Take a look below at the price ratio of the SPDR Gold Trust ETF (GLD) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/GLD is outperforming (up more/down less) the denominator/IVV.
The spike up in outperformance occurred in August 2011, mainly as the Summer Crash I am known for having called took place, peaking before September began relative to the S&P 500, and then falling off a cliff in terms of relative performance since then. The trend remains firmly lower, and now without the prospects of QE3 it may make the argument for holding Gold less appealing. I have annotated to show where I think the price ratio may actually be headed, which in turn means a return to leadership may be months away.
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