Mon Aug 15, 2011 11:04am EDT
(Corrects text in graphic to show correlation tightens to near negative 0.7, not postitive; new hyperlink)
* Gold/S&P ratio rises to 1.6, escaping range around 1.1.
* Further economic shocks should help ratio rise further
By Frank Tang
NEW YORK, Aug 12 (Reuters) – Mounting fears about a double-dip recession and a U.S. government debt crisis prompted equity investors to seek refuge in bullion, sending the Gold/S&P 500 ratio to its highest in 23 years this week. The ratio, calculated by dividing the price of an ounce of gold XAU= by the S&P 500 index .SPX, has traded in a range between 1 and 1.2 from January 2010 to June 2011. In the past four weeks it climbed nearly 50 percent, hitting 1.6 on Wednesday, the highest since September 1988.
Gold/S&P hits 23-year high: r.reuters.com/kuv23s
Gold/stocks correlation : r.reuters.com/cez23s
Heightened economic uncertainty around the globe suggested the divergence between safe-haven gold and equities —
considered a riskier asset — has room to widen further,analysts said.
“If we are going to enter another period of massive economic slowdown, one would have to expect risk assets and the S&P to underperform gold as well,” said Adam Sarhan, CEO of Sarhan Capital, a consultant to institutional investors.
The anticipation of dire economic events, such as the Standard & Poor’s downgrade on U.S. Treasury debt last Friday,
default by a euro zone country or problems in the European banking sector, prompted investors to favor gold at the expense
of riskier assets.
“Right now, with the dollar and euro in trouble — people are talking about the euro failing. If you have a ‘black swan’ type event with a major currency, people are going to flock toward gold,” said Sarhan, using a term for a low-probability economic shock that catches markets unprepared.
Some daytraders are reaping big returns from this week’s extreme volatility, by betting on exchange-traded funds such as
the FactorShares 2X: Gold Bull/S&P500 Bear ETF (FSG.P), which ‘double-short’ S&P futures and ‘double-long’ gold prices.
On Friday, the ratio fell back to around 1.5. Daniel Hwang, senior currency strategist at GAIN Capital’s
FOREX.com, said that a possible third round of quantitative easing by the Federal Reserve could boost both gold and
equities at the same time. “My opinion is for the S&P at that point to outpace gold again as investors pull out of safety and chase higher yields in equities that are being supported by central-bank policy
actions,” Hwang said.
(Editing by Alden Bentley)