So writes Jordan Roy-Byrne, CMT (thedailygold.com) in edited excerpts from his original article* entitled Will the S&P 500 Impact Gold Stocks?.
[The following article is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here – register here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Roy-Byrne goes on to say in further edited, and perhaps in some places paraphrased, excerpts:
The relationship between the gold stocks and the stock market is difficult to pinpoint as its quite scattered. At times the two markets can trend together and in either direction. Sometimes when the stock market is falling, gold stocks can rise. The reverse can also happen as has been the case for the past two years.
The determinant is the current correlation between the two markets:
If the two markets are trending together then they will continue to trend together following a major trend change…yet
if the two markets are negatively correlated (with the S&P 500 rising) then they will remain negatively correlated after the trend change.
The following are important examples of the above [as can be seen in the 2 charts below]:
The gold stocks (red) and the S&P 500 were negatively correlated from 1972 to 1978.
The gold stocks then exploded to the upside from 1972-1974 while the S&P was in a bad bear market.
As the bear market ended, gold stocks fell into a consolidation and a decline which closely resembles the most recent bear market.
When the S&P 500 fell into a mild cyclical bear market, gold stocks emerged from their bottom.
The Late 1990s – Early 2000s
Many market observers forget the period of the late 1990s. The gold stocks were in a nasty bear market as the Nasdaq went parabolic.
The S&P 500 continued to rise into 2000.
Similar to 1973-1975, the gold stocks exploded higher despite a severe bear market in general equities.
[As can be seen in the chart below,] over the past two years the gold stocks declined nearly 70% while the S&P 500 advanced nearly 50%. The stock market falls because of rising inflation or because of tighter credit or recessionary conditions. Rising inflation is usually a boon for metals prices but negative for general equities as it cuts into margins and hurts corporate profits.
The Current Situation
Currently corporate profit margins are at all-time highs while revenue growth is lacking. With the S&P trading at over 18x trailing earnings, the market is not cheap and therefore is vulnerable to rising rates and rising inflation…[Should] the economy near recession and the stock market falls for whatever reason, policy makers…[would most likely] act and…[that] would benefit precious metals.
In summation, if you are a gold stock investor there is no need to worry about the stock market.
History shows that some of the best gains in gold stocks (1972-1974 and 2000-2002) occurred during a bear market in stocks.
History also shows that given the current negative correlation between the two markets, we should expect gold stocks to perform well if the stock market is in the very early stages of a bear market.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
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