Gold Oil Ratio Strikes Again for Shares

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The end of the world may be tomorrow, but it’s only the beginning for the Gold/Oil – stocks correlation.

Gold falls, oil rises and stocks push higher.

A declining Gold/Oil ratio means rising stocks.  The inverse relationship remains solid.

Since mid June, Gold/Brent fell 15%, vs. 29% for the Dax, 11% for S&P500 and the FTSE-100.

Over the last 12 days, the Gold/Brent ratio fell 6%, while the S&P 500, FTSE 100 and Dax-30 rose 3%-4%.

We last explained this relationship in our July 18 piece “Dax Confluence & Gold/Oil Ratio”, making the case for further gains in major equity indices on the rationale that a decline in gold relative to oil prices paves the way for an improvement in risk appetite (more favourable for energy prices than for metals).

A falling G/O ratio reflects the proportional stabilisation in oil, which is usually accompanied by a rise in risk metrics, such as equities and energy currencies. The falling gold component would be a result of anticipated increase in bond yields as central banks “go all in” their policy easing and turn their backs from the inflation part of policy targeting.

Stocks may pause when the Gold/Oil (Brent) ratio stabilises and eventually rebounds, which could be a result of declining oil – partly resulting from increased shale oil/gas production and slowing global demand.

As we anticipate further declines in Gold/Brent from its current 15 towards the 13.50-14.00s, then further gains in equities would be in store. Subsequent upside targets for the major indices are as follows: 8100 for the Dax, 6330 for the FTSE 100 and 1490 for the S&P 500. Japan’s Nikkei 225 has just broken a major 30-month trendline resistance to recapture the 10,000 level, with 11,300 seen as the next barrier.