Dow ETF vs. Gold ETF

February 6th at 9:07am by John Spence

Gold prices have risen for 12 straight years and outperformed U.S. stocks in the wake of the financial crisis as investors buy the precious metal for inflation protection and as a disaster insurance policy.

However, some technical analysts are closely watching the relative performance of gold versus the Dow Jones Industrial Average to get a sense for when the long-term trend may reverse in favor of U.S. stocks. The Dow breaking above 14,000 for the first time since 2007 has put this ratio back in the spotlight.

SPDR Gold Shares (NYSEArca: GLD) has posted a five-year annualized return of 13.1%, more than doubling the 5.3% return of SPDR Dow Jones Industrial Average (NYSEArca: DIA), according to Morningstar.

“It currently takes less than a mere 8.5 ounces of gold to ‘buy the Dow’ which is considerably less than the 44.8 ounces it took back in 1999,” according to chartoftheday.com.

“Priced in gold, the Dow has been in a massive 13-year bear market,” the service notes. “The Dow priced in gold paints an entirely different picture than that of the Dow based on the US dollar (which continues to trade near post-financial crisis rally highs). On a positive note, the Dow priced in gold has just broken above resistance of its latest downtrend channel.”

The Dow has been outperforming gold since mid-November. Pension Partners chief investment strategist thinks stocks will have a good 2013, and gold likely underperforms. However, he suspects a short-term correction is likely as gold takes back leadership for a bit.

“Gold tends to outperform stocks during risk-off correction periods, as money on the margin favors less volatile assets during deflation scares,” Gayed writes for MarketWatch. “The trend has unequivocally been down as stocks have performed considerably better than gold, and I suspect that broader trend lower will continue. However, in recent days, gold appears to be stabilizing.”

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Full disclosure: Tom Lydon’s clients own GLD.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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