Markets: Split theory
It is rare for a bull market in stocks and gold to co-exist
Niraj Bhatt & Amriteshwar Mathur / Mumbai December 02, 2005
Gold has touched a new high of $500, up from about $450 a year ago, and there are expectations that it will go higher. Stock markets in emerging countries are also touching new levels. Historically, stock markets and gold have rarely moved in the same direction for very long periods. Gold prices have been on a secular growth since March 2001, though there have been some exceptions. In the recent past, gold prices and the Dow Jones went up simultaneously from February 2003 and March 2004, and since then, the Dow is at about the same levels, while gold has gone ahead. In India, both gold and the Sensex have been rising since April 2002. Gold prices have made new highs around the fourth quarter of every calendar year since the past four years owing to festive purchases in India and elsewhere in the world, but this price spike has not sustained in the subsequent months. For example, gold prices fell from $453.4 in November end last year to $422.15 in January 2005 and $414.45 in May end. Since then, gold has appreciated 19 per cent. To take advantage of this spurt, speculators and hedge funds have also taken large positions in gold, moving out of oil. Funds in US and Europe are flush with liquidity and there are not too many investment opportunities available to them. Though the two asset classes, gold and emerging markets, are at opposite ends of the investment spectrum, both have attracted these funds. The sharp movement of gold in the past few days, is thus the result of investment purchases combined with speculative buying. Only time will tell if the price will decline after the festive season rally or whether it will touch the $600-plus peak, which happened last in 1980. Also, investors may consider it prudent to sell at these levels. Closer home too, history suggests that it is unlikely that the bull market in stocks and gold can co-exist for a long time. One can’t be sure though, there’s always a first time.
