An explosive move in the S&P 500 has caused it to be up for the year by 9.6%, as of yesterday's writing, 7/23/09. Gold is a competing asset class and represents real money. Gold in contrast has been relatively quiet for 2009 so far. However, as of Thursday, it is up from 869.75 to 951.5, 9.4% year to date.
When I look at gold I always use the London Bullion Market Association for prices. Everyday at 3 pm in London the big central bankers price the trades on their beautiful 400 ounce London Good Delivery Bars. Now that nearly 7 months have passed and both assets are tied for performance, the question becomes where do I put my money for the rest of the year? Although I believe that we didn't hit a secular bear market low, that doesn't mean we can't continue to rally.
In my article on why you should consider small caps now, I mentioned that the S&P 500 had negative returns from 2004-2008, a 5 year span. Every time that had happened in the past, the return over the next 2 years was hefty. However, one thing changed in 1968. The U.S. let the price of gold float against fiat currencies. So over the last 40 years the LBMA has recorded the daily prices of gold. The statistics can be found here. Since 1968 there have been 11 years where the last 3 pm fix at the end of the previous year was not broken from February 1 till the end of December the next year. As an example, the last PM fix for 2008 was 869.75. Since February 1 of this year we have not fixed below that price, in April it fixed at 870.25 and 870.5 but NOT below 869.75. That is significant.
The 11 years when gold didn't fix below the last December price from February till the end of the year, that year Gold ALWAYS outperformed the S&P 500 including dividends. This even includes 1987, when by late August the S&P was up an astonishing 43% while gold was up 14%, but by the end of the year gold stood shining with a 25% gain and the S&P finished up 5%.
When people think of rising gold they assume that means falling stocks, but all it means is that stocks go down in real money if gold outperforms stocks. In fact some of the best years for gold went in tandem with nice years for stocks. Of those 11 years when gold outperformed the broad market, the broad market had positive years of 14, 19, 6, 18, 18, 5, 16, and 5 percent. So maybe banks shouldn't be so keen on trying to manipulate the price of gold lower. I will get into that in my next article.
So what is the trade? For conservative people like me I would recommend that you buy gold and sell half or more if it fixes below 869.75. If gold does fall below 869.75 does that mean that gold will be defeated by stocks? No, one only needs to look as far back as 2008 to see gold broke below the 833.75 fix in August and still ended above that for the year. But it does become much trickier.
Disclosure: long physical gold