Metals prices vs. stock prices

droopyd

I've noticed lately that silver/gold prices seem to move up and down in tandem with stock prices.

To me, it seems intuitive that they should move in opposite directions - if stock are seen as a better investment, PM prices should go down, and vice versa.

Am I missing something? I'd be interested in any thoughts people have on this subject.

Thanks!

OPA

My guess is, with interest paid on savings, cd's, t bills & t bonds at an all time low..The public is looking for a higher return. Stocks & PM's appear to be the other option.

pf70collector

Maybe all the free money from the FED to the banks entering into both markets. Spread the wealth around. The FED likes to create bubbles, giving the illusion everything is ok until they burst. Rinse and Repeat.

RedTiger

<< <i>Maybe all the free money from the FED to the banks entering into both markets. Spread the wealth around. The FED likes to create bubbles, giving the illusion everything is ok until they burst. Rinse and Repeat. >>



Bingo. When the Fed recently announced interest rates are to stay low through 2014, gold, stocks and bonds all moved sharply higher. Folks moved away from cash into everything else.

The caveat is that one day or a few observations do not constitute evidence. The correlation tracker at:
http://www.sectorspdr.com/correlation/
link

says GLD and SPY are negatively correlated -0.7

compare this with say XLE (energy stock ETF) and SPY which are positively correlated 0.93
or GLD and GDX (gold miner ETF) have a positive correlation of 0.31

what may surprise some is that for the past year TLT (treasury bond ETF) and GLD are positively correlated. That bonds and gold move together is a bit of a stretch for the mind because inflation would be bad for long treasuries and good for gold.

derryb

It's a matter of which asset classes appear most attractive to investors at any point in time. Currently they are running out of options as the world's central banks' policies either destroy or give fictitious value to different options. The more they run out of real options the better real money (PMs) will look. And yes, economic (and/or political) policy can devalue PMs at some point.

It boils down to where investors can put their money and what returns (and safety) they expect on that money. Market expectation determines where this money goes, or from where it departs. Keep in mind today's markets are more subject to manipulation more than ever in history as governments try to encourage or discourage particular asset class investments. We see where previous encouragement to invest in real estate landed many investors. It is no secret current policy is designed to herd US investors into stocks and away from PMs. While it seems to be working with stocks it is not working with PMs. This could easily result in a "stronger" policy to discourage PMs.

A good chartist may even find a correlation between when PMs get hammered and how they were doing when compared to different stock indexes. I'm sure those with the hammer have some formula that tells them when to pound away.

ricko

Derryb... what kind of 'stronger policy' would discourage PM investment?? Cheers, RickO

derryb

<< <i>Derryb... what kind of 'stronger policy' would discourage PM investment?? Cheers, RickO >>


Higher taxes on sale of PMs, legal changes (more paperwork hassles or registration) to ownership or transfer of PMs, or downright making ownership illegal. Skies the limit when it comes to those that dislike investment dollars moving to PMs - they have the power to make it happen. As long as PMs pose a threat to where "they" want investment dollars to go, there will always be additional risk with investing in PMs. As more money moves to PMs, this particular risk increases.

Keep in mind that the strength of PMs is not by design. It is the result of blowback (unintended consequences) from bad economic policy.

roadrunner

If you can't get your physical PMs without onerous taxes and new requirements there's always mining stocks and bullion ETF's. Note that when private bullion ownership was
not allowed in 1930's the investors went for gold mining stocks.

There's always brief periods of time where normally divergent assets like dollar vs. gold and Dow vs. gold actually move together. If you look at Dow vs. Gold over the past 10
yrs you'll see the long term trend is down....and far from complete. Right now liquidity is driving both stocks and bullion as the dollar has moved down over the past few weeks.

droopyd

Thanks for your responses! I'd of course totally forgotten about the bond market....

RedTiger

<< <i>Derryb... what kind of 'stronger policy' would discourage PM investment?? Cheers, RickO >>



I'll echo his reply, taxes, regulation. For example, India imposed a 1% tax on gold imports, then raised it to 2%. Gold sales fell about 40% after the 2% import tax went into effect. Sales probably will rebound, as the move was telegraphed and folks stocked up, but it does show how sensitive some folks are to a small tax. Someone else said that India alone accounts for 27% of world demand for physical gold. Australia hiked their taxes on miners, and those equities suffered.

I'll add that monetary policy in India and China can have a big role in demand. High real interest rates make metals less attractive. While interest rates are near zero in the financially stable developed countries, they are well above that in China.

This thread is a cautionary tale of drawing conclusions from anecdotal observations and then trading on that conclusion. I was like the op, thinking that gold and SPY were more highly correlated. Of course, that website link is a black box and I can't verify their calculations or their data, though it does give the option of plotting a graph to give it the eyeball test.

/edit to add: for the conspiracy folks, there are any number of ways a government spook operation could be done to drive down the price of metal. For example, spread a rumor about a bacteria that lives on the gold, and falsify reports of several deaths of big hoarders of metal. Release this on the news and the Internet and 80% of the women, and half the men will run to dump their gold holdings. This kind of spy op is one of many ways it could be done and prices could be driven down 80% in a short time period if enough resources were devoted to the project.

Baley

In this day and age, a rumor can't be quickly verified or refuted, and the source traced? people are generally suspicious and cynical especially big gold owners

I'd contend that stocks represent engines and gold (and other monetary assets represent) compressed, stored fuel.

The fuel itself cannot build or move products around, nor build more engines

the engines cannot operate without some kind of fuel (usually US dollars are most convenient and efficient in the engine, and some are built, maintained, and run better, so naturally give better productive performance.

sometimes, engines (companies) and fuel can run rough, run hot, run cold, seize up, fall apart, explode, or purr like kittens cranking out cuddly value every day

sometimes stored fuel ignites, or sticks together, or explodes or evaporates, gold does not do any of these things, it's eternal and that's why it's the best fuel there is..

and will never by itself be as productive as the most profitable, legitimate, value added companies. And it will always be better than a bad company (stock)

ricko

OK.. thanks for the replies. I want to buy some of that contaminated gold - CHEAP!! Cheers, RickO