Monday, 15 April 2013

S&P 500 to Gold Ratio Above 1.0 for the first time in two years

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.

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