Gold and Dow- Comparative Analysis

With DJIA near all term highs, Gold will continue to be a part of our lives. Here’s why..

When the Bretton Woods Agreement collapsed in 1971- 1973, gold was pegged at around $35- 40 a troy ounce to the greenback. Since then, the precious metal has risen close to 3500 percent in 45 years.

For a more realistic picture, consider the gains in both Gold and the DJIA since 2000. While gold prices spiked close to 350 percent in the last 16 years, investments in the 30 stocks that comprise the Dow Index would have fetched a meagre 85 percent, most of which have come in the last 5-6 years. However, there are a number of individual stocks that have outperformed the index, no doubt about it...

 

Is gold negatively correlated to the stock markets or is it only a myth!!

Is it possible for investors to profit from both forms of investments concurrently..

Most of the companies listed on an exchange have assets which can be categorised as tangible/ intangible, appreciating/ depreciating, liquid/ illiquid. These assets back the price of a company’s shares trading on the exchange to a certain extent. A company operating without any assets is likely to collapse anytime. Likewise, gold is a tangible liquid asset with an inherent value and will always continue to remain so.

Secondly, just like any other commodity being mined or produced; be it metals, agro- commodities, energy etc., gold has costs associated with mining and production which continually keep pace with inflation, labour and demand. Therefore, during periods when investors shift their investments from gold to the other asset classes, prices of the precious metal may fall due to lower demand but does not collapse altogether. However, well- reputed listed companies with huge debts can become worthless and there are many examples to cite historically.

Thirdly, stock markets are a barometer of the economic performance of a country. In this age of globalization, change in the Government policies of a country, catastrophic events, wars, political uncertainty etc. lead to systematic risk that not only affect the economy of that particular country but can also be felt globally. However, there are no such risks associated with gold. As a matter of fact, the precious metal is extremely in demand during such occurrences.

So, although gold is negatively correlated to conventional asset classes and is considered an alternate asset and used as a hedge by investors, the demand for the precious metal continues unabated in other forms in our day to day lives. However, when it comes to stocks, the parameters used to analyse them are different.

That’s one of the reasons gold prices do not crash as much as stocks in a bear market and their negative correlation does not mean the quantum of profits in one asset class will lead to equal losses in another. Rather, they have to be looked at as a long- term investment horizon.

A quick analysis of the charts shows Dow hovering near all- time highs and the upside could continue all the way to 22500- 22600.Key supports at 21150- 21200, offering long trading opportunities with stops at 21050 for targets of 21500. 

Short term traders can also go long on the index above 21600 with stops at 21500 for targets of 21900- 22000. However, if the index closes below 20800, all short- term long bets should be off as the index could slide to 20000.

Spot Gold on the other hand is in a bearish primary trend with key resistances at $1270. If prices close above the resistances for a week, consider it to be a trend reversal. Immediate supports are at $1240, offering short- term opportunities to go long for near term targets of $1265- 1270. Long positions initiated at these levels should comprise of SAR at $1230 for targets of $1200- 1205. 

Short term traders can also go long on the index above 21600 with stops at 21500 for targets of 21900- 22000. However, if the index closes below 20800, all short- term long bets should be off as the index could slide to 20000.

Spot Gold on the other hand is in a bearish primary trend with key resistances at $1270. If prices close above the resistances for a week, consider it to be a trend reversal. Immediate supports are at $1240, offering short- term opportunities to go long for near term targets of $1265- 1270. Long positions initiated at these levels should comprise of SAR at $1230 for targets of $1200- 1205.

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