Below is a chart looking at the S&P’s and Gold’s relative price performance over the past 5 years. Aside from the obvious, namely that gold has been a way better investment than stocks (up 100% versus down 5%), if we look a little more closely we can see an interesting trend emerge.
Over the past 5 years we can see that for the majority of the time the US stock market (S&P 500) and gold moved in the same direction (grey). So when gold fell so did the S&P, and when the S&P rose gold also rose. Broadly speaking this type of market action has happened 36 months out of the last 60.
But there were occasions, happening just 12 months out of the last 60, where the gold price rose when the S&P fell (green). These occasions were rare (happening 20% of the time) and short lived (lasting around 3 months), but often producing the fastest gains for gold.
There was one period lasting 12 months, from August 2011 to August 2012, where gold went down and the stock market went up (blue).
So are we due another brief but powerful period in the market when gold rises and stocks fall?
Looking again at the above chart, we can see that the average time when gold isn’t in this (green) +ve divergent period is about 12 months.
The past 14 months has been a period when stocks have either risen whilst gold has fallen (blue) or both stocks have risen/fallen together (grey). So you could argue that we’re actually past due seeing one of these (green) periods once again.
The average time that gold goes up and stocks fall (green) over the past five years is just 3 months, this compares with the average 12 months that gold and stocks fall/rise together (grey) or stocks rise and gold falls (blue).
However this period (green) is also when some of the biggest and fastest gains in gold can be made.
During these (green) periods gold has averaged more than a 20% rise in the price, whilst US stocks have on average fallen just under 20%.
So what are the past 5 days telling us is happening?
Here is gold and S&P 500 for the past five days. You can see that positive divergence (green) started on Tuesday. Since then gold has gone from $1685 to $1730, a rise of 3% whilst the US stock market has gone from 1430 to 1385, a fall of around 3%.
It’s too early to know for sure if gold has entered one of these brief (green) periods where it rises and the S&P falls, but if we are then an average repeat of the past 4 periods in the last five years should see gold going to over $2000 in the next 3 months.
And it would mean a fall in the S&P to around 1215 over that same time frame. Sound fanciful?
Just remember, the last time gold went up and the S&P went down the S&P lost some 15% whilst gold went up around 23%. The reason for the positive divergence in the summer of 2011? The seeming incompetence around Congress to agree to a debt ceiling raise, sound very familiar?