Following an 11.4% increase in the S&P 500 index (in U.S. dollars) this year and a 5.5% decline in the price of gold (U.S. dollars per Troy Ounce), the ratio of the S&P 500 to gold ratio hit 1.01 this Friday. This was the first time on a week ending basis that the ratio exceeded 1.0 since 30 April 2010. The ratio fluctuated within the 0.63 to 0.99 range during the 7 May 2010 and 5 April 2012 period.
To the extent that gold represents a safe asset in times of economic turmoils and increases in stock prices represents increased optimism about future economic prospects, the fall in the gold price accompanied by a surge in stock prices resulting in the increase in the S&P 500 to gold ratio perhaps signals a decreased risk aversion for investors.
Combined with an ever higher market valuation of the U.S. stock market, stock market investors should pay close attention to this rapid increase in the S&P 500 to gold ratio as the two do signal optimism has increased substantially this year. And when the market is optimistic, the prudent investor should be careful.
To the extent that gold represents a safe asset in times of economic turmoils and increases in stock prices represents increased optimism about future economic prospects, the fall in the gold price accompanied by a surge in stock prices resulting in the increase in the S&P 500 to gold ratio perhaps signals a decreased risk aversion for investors.
Combined with an ever higher market valuation of the U.S. stock market, stock market investors should pay close attention to this rapid increase in the S&P 500 to gold ratio as the two do signal optimism has increased substantially this year. And when the market is optimistic, the prudent investor should be careful.
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