Gold Forecast: Gold And The S&P500 What Next?

November 17, 2015

Gold kept falling last week and stayed within our forecast channel. Our long awaited fall to lower lows seems finally to be underway, a new lowest weekly close for over five years last week added to the bearish sentiment surrounding the metal.

Not only do we create gold price forecasts but we also monitor gold in relation to other assets, this week we will be focusing on gold in relation to the S&P500 our charts below show the ratio between these two assets a rising value means gold outperforming the S&P500 and falling value shows gold is underperforming.  

Gold has underperformed the S&P500 since its peak in 2011 and although our analysis shows that there is little evidence at present of a change in this trend, we are however very interested in what happens next and our analysis will explain why.

gold price chart

We have separated this ratio in to four distinct phases to hopefully explain why we think this is worth watching. Phase 1 is the orange block and stretches from the 1980s through to 1996, we call it the benign phase. Debt is not an issue in the developed world, there are virtually no asset bubbles, the banking system is in good shape and central banks are far from a dominant force, during this time gold consistently underperforms against the S&P500.

Phase 2 is the green block and lasts from 1996 to 2000 and it is the first bubble phase, the Dot Com Bubble, credit growth is growing the banking system is in the early stage of a private credit bubble. The internet is recognised as a game changing technology, capital pours in to the sector there is optimism at first and then there is greed. Internet stocks become valued at extreme levels until finally the bubble bursts. The gold S&P/500 ratio heads below 0.5 at the start of this phase and then bottoms as stocks peak.

Phase 3 is the blue block from 2000 to 2007 it’s the real estate credit bubble phase, Glass-Steagall has been repealed and banks go on a lending spree, credit standards are loosened and a real asset bubble rises. The public becomes addicted to cheap credit and household debt increases. The ratio bumps under 0.5 for several years at the end of this phase. The S&P500 regains its high but gold has been an outperformer as it has moved up substantially from its turn of the century low.  

Phase 4 is the red block and runs from 2007 to present; it’s the financial crisis stage and the second debt bubble where public bodies dominate the economy. Governments run huge deficits and central banks push rates to zero embarking on quantitative easing in an attempt to stop the previous credit bubble from deflating. The ratio dramatically breaks above the 0.5 range just as the financial crisis gets underway after trying to break through for over a year; gold surpasses its previous nominal high and begins to outpace the S&P500 through till 2011.

After peaking in 2011 the ratio begins to head lower, it has not dipped below 0.5 on a monthly closing basis since the financial crisis but now it sits just above this level. So the question is really does the ratio show that the financial panic is over and are we at a similar period in time to 1996 when the ratio last broke down below 0.5?

Well our answer is no the financial crisis is not over and we are not in similar shape to the mid nineties benign phase. But that is not what the market has been saying since 2011, the market has favoured assets that deliver a yield over gold. Return on assets has become more important to the market than return of assets that implies a great deal more faith in the financial system than in 2011.

gold price chart

From 2000 to 2011 gold outperformed the S&P500 more than eight fold leading to a ratio of 1.5, however since then the S&P500 has outperformed gold almost three fold but that still leaves the ratio above 0.5 with gold outperforming the S&P500 since 2000 by about threefold and at the same level as the original financial crisis dramatic breakout.

Any ratio really shows the how the market values two asset classes relative to each other and not in pure monetary terms, it takes no account of whether the assets are rising or falling in pure dollar terms. But it does give a clue to levels of confidence within the general market and over the last few years the market has been as optimistic as the mid nineties. Any investor who rotated from gold to stocks in 2011 has been well rewarded much to the consternation of many gold bulls.

We have already come close to 0.5 on a monthly closing basis and we may well see a close near that number again soon based on gold’s current sentiment. Whilst it may or may not be significant it seems as if the turmoil in the stock market as this ratio was reached may give the gold bulls some room for optimism on a relative basis. We shall be interested to see how this ratio performs over the next six months and whether the market continues to view the future as benign as the mid nineties.

With our current over leveraged financial system, excessive household and public debt it seems hard to imagine that this ratio would continue to move decisively in favour of stocks, so we shall see if the 0.5 level that acted as a significant ceiling pre crisis can now act as support – interesting times.

During the last year we have consistently forecast lower gold prices we have never deviated from this long term forecast. All our analysis has shown that we spent the last two years in a bear market consolidation and we are now continuing the bear market that began in 2013. Unusually for most analysts you can see our track record right on our front page and you can sign up to get our 30 day forecast sent to your inbox every weekend.

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To view one of the most accurate and unique gold price forecasts available visit us at: http://www.kenticehurst.com

Ken Ticehurst been a gold trader for over a decade and is currently developing a unique gold price forecasting system using fractal analysis and unique algorithms. He creates forecasts using different patterns that occur over daily, weekly and monthly time frames. In his view news does not move prices over the long-term, but rather that prices move news over the long-term. Human nature demands an explanation for every price move. It is his philosophy that day to day and even week to week moves are just noise disguising the long-term trends.
 
Ticehurst has a BSc.(Hons.) in Product Design from the University of the West of London with a commercial background in data analysis and research. Ken has been involved in markets as diverse as classic cars, construction and real estate.  He has seen bubbles grow and deflate time and again, subsequently giving birth to his galvanizing interest in the underlying sentiment that drives the fear and greed phases.  Ken’s website is:  http://www.kenticehurst.com

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