Investors Now Loving Stocks More Than Gold
Historically, gold has been more loved by investors than stocks, but that's now changing as weakness in gold relative to equities continues.
-- Julie Andrews
On January 26, I wrote a piece on MarketWatch titled “Betting on Inflation? Don't Bet on Gold” in which I argued that if I'm right about 2012 looking similar to 2003 and 2009, whereby reflation kicks in and investors get more bullish on risk assets, then stocks could strongly outperform gold.
While gold is often seen as an inflation hedge, I think stocks may have much more room to run than gold from a relative perspective. Consider that the asset class most hated over the past decade has been equities, and most loved has been gold. Mean reversion would argue that it's time for the opposite to happen.
Take a look below at the price ratio of the SPDR Gold Trust ETF (GLD) relative to the Dow Jones Industrial Average (DIA). As a reminder, a rising price ratio means the numerator/GLD is outperforming (up more/down less) the denominator/DIA.
There has been a complete collapse in gold's relationship to the Dow in recent days, as the ratio continues its descent following the outperformance peak in late August. The trend still looks to very much be in place, which means that within the broader reflation theme, there is likely more potential for stocks to continue outperforming the precious metal.
The ratio is now back at early 2009 levels, which means that from a pure performance standpoint the Dow and gold have performed roughly in line.
Could we be entering an environment where the best hedge against rising inflation fears is not gold but actually stocks? Given the slowdown in China, which has driven up demand in commodities across the board, it does appear to be a very real possibility. Gold has been unable to hold onto outperformance gains relative to equities for the past three years. Could the time come now for a true period of strength in the one asset class not getting any love from gold investors?
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