SPX:GOLD Update

Throughout this blog, you will see a lot of pairs trading analyses, see "How to Trade Like a Hedge Fund" or "Intermarket Analysis." I prefer this form of analysis as investing is nothing more than choosing one asset class from the myriad of classes: stocks v. bonds, stocks v. gold, stocks v. real estate, etc. Good investors will see the capital flowing between classes (as evidenced by the bidding up of prices) and try to capture the price appreciation.

The recent price action between gold and the SPX seems to indicate that a blow-off top in gold occurred. The SPX is very undervalued historically vis-a-vis gold. When the SPX:gold ratio was this low last time (March 2003), equity markets responded with a massive upsurge. However, undervalued assets can stay undervalued for a long time and the SPX:gold ratio may break below its 2003 low. As a result, the price action between now and January 2006 should hep establish whether a bottom in the SPX:gold ratio has been established for this investment cycle. If this is indeed the low, load up on stocks for 2006. Now I am skeptical about stocks at this moment due to the purported housing bubble, deficits, etc. However, this is how bull markets are born, climbing the proverbial wall of worry.