Is there a relationship between the price direction of US stocks and gold, silver or copper? Yes, there appears to be a relationship, but potentially useful information also comes from the relationship of stocks to the ratio of some of the metals.
This is a follow-up to a prior article reviewing several ratios that might be useful for confirmation, if not close order forecasting of market direction changes.
Each of the charts that follow are 20-year charts that additionally include the latest prices or ratios for last Friday (05-13-2011). Some of the metals prices or metals price ratios are multiplied by a factor to get them visually onto the same scale as the S&P 500 price index.
This chart of the S&P 500 versus gold bullion, does have much backward looking predictive power with respect to stock prices.
click to enlarge images
This chart of the S&P 500 versus silver could be somewhat revealing. There was no interesting relationship between silver and stocks until the bottom of the stock market in 2003. Before that time, the big thing was technology, after that time the big thing was emerging markets industrial development.
Silver rose as the US stock market rose, and began a downturn at about the same time that the stock market began a downturn. It picked up well before the stock market bottomed, and has risen even more strongly as the US market rose after its bottom in 2009. Lately, silver went parabolic (a common precursor to a major correction or bear), and has entered an important downward adjustment at about the same time that the US stock market is exhibiting some weakness.
There may be some predictive value here, but the parabolic rise of silver brings the value of its correction into question as a predictor of stock prices -- unless the parabolic rise was a purer study of high expectations for economic growth. The stock market in the short-term works very much on growth results versus growth expectations.
The Q1 earnings reports were above expectations, but that is history and the mind of the market is on to the next quarter, where growth faces various challenges from tightening in China, to inflation globally, to Middle East instability, to demand destruction through recently high oil prices, and looming questions about European sovereign credit, US Federal Reserve actions and wonder as to who will buy all the Treasuries to support the US budget deficit, as well as immediate questions about the US debt ceiling.
This chart of the S&P 500 versus copper resembles the stocks versus silver chart, but shows more economic sensitivity in the mid-1990's as stocks changed trajectory upward, but then trailed off.
Like silver, copper rose with stocks from the 2003 low, but unlike silver showed several periods of correction in 2006 and 2007 before the 2008 stock market crash. Copper reached a high level and apparently looked itself in the mirror a few times and expressed significant doubts about just how high it could reasonably go without falling down.
Copper corrected strongly with stocks in 2008 and then rose with them after 2009 in an essentially coincident way. Copper was prescient in expressing its doubts in 2006 and 2007, and may be beginning to express doubts again, as it is declining significantly more than stocks at this time.
Copper did learn from ancient history however, by not repeating the story of Icarus, son of Greek craftsman Daedalus, who attempted to fly to the sun on wings made of feathers and wax. He fell into the sea as a result. Silver may not have studied Greek mythology as closely as copper.
And, by the way, with respect to governments over-promising, over-spending, and getting into trouble, the Greek government didn't remember the Greek story of Icarus when it built a society supported by wings of feathers and wax.
Tim Geithner's announcement that Medicare will be insufficient twelve years from now to fund its promises to the huge bulge of baby-boomers passing into the system sounds a bit like the Icarus story as well.
This chart of the S&P 500 versus the gold/silver ratio, shows a significant coincident inverse relationship to stocks. A turn up in the gold/silver ratio should probably be given serious consideration with respect to the "risk-on", "risk-off" behavior of investors.
Except for the 1998 - 2000 period of dot.com euphoria, the gold/silver ratio tended to go in the opposite direction of stocks.
The inverse of the gold/silver ratio (the silver/gold ratio) is possibly visually more useful to some, but is just the same thing as the reversals that take place in a mirror. It is giving some warning signs.
This chart of the S&P 500 versus the copper/gold ratio shows some coincident relationships, with a bit more of a warning in the 2006-2007 period, and is more tempered by the gold component of the ratio since 2009.
We'd probably rather use the stocks versus copper than this ratio looking for clues.
We think stocks versus copper and the stocks versus gold/silver or silver/gold are worthy of continuing observation as one of several other indicators for confirmation or divergence with respect to stock market direction.
Relevant ETF Securities:
- S&P 500: SPY, IVV
- Gold: GLD, IAU, SGOL, UBG
- Silver: SLV, SIVR, DBS, USV
- Copper: JJC (an exchange traded note)
Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advise to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on our site available here.