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Is Gold Safe Alternative to Stocks When Stock Markets Are Peaking?

Fiala Petr
Published: 28.4.2012 | Last modification: 28.4.2012 09:41  | Comments: none
In recent days , many reports saying that stock markets may be near the spring price peak after a long growth have emerged. If this is true and the price peak in stock prices will appear in the near future, then the question is: what should I invest in?

Since gold has not been through a very good period and it was not in the favor of investors in recent months, I thought this metal would be a reasonable alternative, where investors will look for salvation; but is gold really a safe haven when investors' uncertainty is rising and the volatility in markets is growing? I will try to answer this question. I tried to calculate how the price of gold behaved on average since the moment when the ETF SPY price (S&P 500) began to decline, using a seasonal development calculation module (www.finecharts.com). It is therefore the calculation of average daily earnings since the beginning of the declines; these gains/losses are then summed cumulatively.

Figure: Below is the SPY price, above is the GLD price. I chose the dates listed in the bottom chart as moments to compare the subsequent price development of SPY and GLD. These were 16 periods of declines in the SPY in the period of July, 2007 - October, 2012. I also took into account the local shorter declines sometimes only lasting about ten days.


Figure: Therefore, in the case of the SPY the average decline was 28 days long, and during this period the price droped by an average of -6.9%. Before reaching its own price peak, the last brief price growth lasted about 19 days, and the SPY reached a +3.7% increment.



Figure:  The price development of gold from the time when the SPY price peaks. Gold has certainly represented a suitable alternative to stocks in the past five years when the SPY price was at its peak. Typically, before reaching the price peak in the SPY the price of gold grew similarly to the SPY, and it grew about five days more after reaching the peak in the SPY. This was followed by a five-day decline by about one percent, which was then replaced by eleven days of growth. Twenty days after the SPY reached its price peak, the price of the GLD was on average about 2.5 percent higher, while the SPY price was on average five percent lower.


But how does it look at the major price peaks, the price peaks which are followed by a strong long-term correction lasting several months? I averaged the four last such corrections: from 10/17/2007, 5/19/2008, 04/26/2012, and 05/02/2011. Here is the result for the SPY:

Figure: The average development in the SPY in medium-term corrections - the price of the SPY grows strongly about 68 days before it reaches its price peak. The first decline is strong, on average by -9.5% in 41 days. Then comes a growth correction lasting for about 36 days, followed by another decline that is 65 days long. The overall decreased reached an average of -20%. 




Figure: The situation for gold for the same period as in the previous chart. Gold is the safe haven, and it looks like this applies even more to medium-term corrections. The price of gold grew quite strongly 42 days before reaching its own peak in the SPY, and then for another 54 days afterwards. 140 days after the SPY price peak the GLD price was 13% higher. 




Does the same apply to silver? Is silver just as safe as gold?


Figure: According to this chart it seems like it's far from it. Silver behaves almost like a stock. The greatest declines in silver after 118 days from the price peak in the SPY reached about -8%; the same loss occurred only nine days after the price peak. This is significantly less than in the SPY. In this way silver is a better choice, but it is certainly no win. Therefore, silver is primarily an industrial metal, and this should be taken into account.




Another thing that should be taken into account are the stock markets. Today it seems that as long as investors and traders have inner certainty that the stocks will grow, they are not very interested in gold. This certainty is now associated with the weak Japanese yen, as it often was in the past. The weakening yen is definitely associated with a strong stock market, because it increases the market liquidity.  Therefore, a strong yen always poses a risk for the markets.
This is evident in the following figure.
Figure: The behavior of the ETF SPY after the Japanese yen begins to strengthen - I chose about 10 such periods since March 2009. 32 days before the SPY began to strengthen it grew strongly; when the yen strengthened its growth stagnated. On average after 33 days the price ended at -1.6%.  Note that we are talking about the development during a long-term growth trend in stocks. Therefore, it definitely pays to watch the yen. When it has the tendency to strengthen, gold has the tendency to strengthen as well.




Figure: GLD and FXY price - the FXY is the ETF for the Japanese yen. The correlation between both assets is calculated in the chart for 750 days. The result is 0.93, which is a very high dependency. 750 days is approximately three years, that is the entire BULL market period since 2009.



Conclusion: Gold appears to be a safe alternative when stock markets are peaking. Since stock markets have been growing since October of last year and they are very high, I would seriously consider the purchase of gold. Gold should be part of every investor's portfolio at least in some small part, because it is still a significant diversification factor. Petr Fiala.


Petr Fiala.





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