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July 23, 2015

Gold-To-SPX Ratio Boom-Bust

By Ashraf Laidi  
Jul 20, 2015 13:08

Gold's tumble to a 5-year low today is the latest manifestation of the ensuing crash in global commodities. The reasons are not new: The recent 20% decline in oil will turn an already low-inflation environment into potential disinflation. The Fed's signalling of higher interest rates as early as this year plays up yielding assets against the non-yielding metal. Chinese investors are busy dealing with massive losses in stocks, unable to mount their usual buying of gold dips.

Technically, today's gold low coincided with $1,086, which is the 50% retracement of the rise from the 1999 lows to the 2011 highs. Gold's 12-year run was based on a recovering world economy, brought about by broadening demand for agricultural, metal and energy commodities and accelerated by a falling US dollar as the US twin deficits hit record highs.

Repeating Boom-bust Gold-Stocks Cycle

Comparing gold to equities, the gold/SP500 ratio has fallen 65% from its 2011 highs to reach an 8-year low. So far the pattern appears similar to the boom-bust cycle in the Gold/Stocks ratio of 1974-1980s, when the inflation-driven supercycle in commodities propelled metals to 30-year highs relative to stocks, followed by a 2-year dip in the mid-1970s, only to rally again on soaring inflation and geopolitical shocks (Soviet-Afghan war) and Iran Revolution.

Eventually, gold's damage from the late 1980s into the 1990s sent the gold/stocks ratio to new lows.

If the $1,080 gives way to technical selling, then prolonged downside calls up $1,030, followed by $920. But can the Fed still raise rates if returning disinflation becomes deflation?

About The Author - Ashraf Laidi is an independent global markets strategist with over 15 years' experience. Author of "Currency Trading & Intermarket Analysis", he is the founder of AshrafLaidi.com, and served as Chief Strategist for CMC Markets with several #1 rankings at FXWeek and Reuters. Ashraf holds an MBA from the George Washington University. and is fluent in English, Arabic, French, and Spanish. 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle

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Item Reviewed: Gold-To-SPX Ratio Boom-Bust Rating: 5 Reviewed By: EconMatters