A contrarian trade looks tempting.
Switch out from the rabidly bullish S&P 500 (INDEXSP:.INX), and into gold – possibly the most loathed asset in recent times.
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A modicum of a reaction is manifesting itself in each of the charts above of the S&P 500 as well as Gold (shown inside the red and green ellipses) respectively.
Is it time to book profits in overbought equities and take a flier on trash-canned gold?
Equities will outpace gold
Not yet, say Citi Research analysts Tobias M Levkovich, Lorraine M Schmitt and Christina Wood in their research note on the Chart of the Month for January.
“Despite the inverse performance of stocks and gold in the past year, equities look poised to continue outpacing the yellow metal in the years ahead. When the S&P 500 (INDEXSP:.INX) hit its tech bubble driven highs in 2000, its relative gains were more than one standard deviation above average trend and that is not the case now,” they say.
In the chart the tech-driven high of the S&P 500 is approximately indicated by the down-pointing red arrow. From that point onwards the graph has fallen steeply, indicating the progressively lower number of ounces required to buy the index as gold prices outperformed the latter.
After 2011, we see the graph swinging upwards as the tables turned – equities were in a solid bull grip while gold floundered.
Why gold tripped
According to the analysts, gold lost favor with investors due to a combination of factors that included rising interest rates, a stronger dollar and an improving economy measured by growing GDP and employment; another and possibly the most important reason – lower demand due to economic setbacks in countries such as India which were traditionally voracious consumers of the yellow metal.
“Given the financial crisis and its aftermath for several years, various measures of investor sentiment indicated a lack of excitement for equities and a desire for some non-fiat currency store of value. But, the enthusiasm for bullion seemingly got overdone as the price per ounce soared to near $2,000 before falling back,” says the Citi research team.
Gold still not a bargain
According to the analysts, in terms of standard deviation as in the above graph, the S&P500 has still a long distance to go before reaching the bullish high greater than 1.0 achieved in 2000 (red arrow), indicating equities are still cheap on a relative basis compared to gold.
“There still appears to be a fair amount of room for the recent relative price pattern to continue as the bounce off of more than one standard deviation below trend has only just begun,” says Levkovich.