Gold mining shares have a negative correlation to the stock market

gold mining stocks


A study by Ibbotson Associates shows that gold mining shares have a negative correlation to the stock market, that precious metals performed best when they were needed the most by providing positive returns during the years that traditional asset classes had negative returns. Ibbotson determined that investors can potentially improve the risk-to-reward ratio in conservative, moderate and aggressive portfolios by including precious metals bullion with allocations of 7.1%, 12.5% and 15.7% respectively.

Rob Kirby tells us that Ibbotson Associates generally accepted as and referred to in the investment industry as the quintessential authority on what optimal asset allocation is or should be period!

Famous market follower and newsletter writer, Richard Russell has lectured us many times that bull markets go through three phases. The first phase is a rise in a market when the fundamentals are terrible. The second phase is acknowledgment by experts that there is a reason to buy as a hedge only and prospects seem limited. The third phase is the speculative phase where the public enters and will pay any price not to miss out on this “sure thing”.

Is the market overvalued? A few key indicators that indicate it is.

  • The market is currently trading at 28 times earnings. Based on the December S&P 500 average of daily closes, the Crestmont P/E is 99% above its arithmetic mean and at the 98th percentile of this fourteen-plus-decade monthly metric. The December valuation is the highest since May of 2001 during the Tech Bubble. The previous time the market traded at this high of a ratio was in August and September of 1929.
  • The Q Ratio is a popular method of estimating the fair value of the stock market developed by Nobel Laureate James Tobin. Specifically, it is the ratio of Market Value divided by Replacement Cost.The latest data point is 47% above the mean and now in the vicinity of the range the historic peaks that preceded the Tech Bubble.
  • Regression to Trend. At the end of December the inflation-adjusted S&P 500 index price was 94% above its long-term trend, up from 87% the previous month. The peak in 2000 marked an unprecedented 141% overshooting of the trend — substantially above the overshoot in 1929. The index had been above trend for two decades, with one exception: it dipped about 15% below trend briefly in March of 2009. At the beginning of January 2017, it is 94% above trend, exceeding the 68% to 90% range

Markets can stay above overvaluation or “overbot” for days, months, and years.

It is risky to try to guess tops when a market is overvalued. Markets can hurt you by becoming more overbought like the tech bubble market did in 2000. Only in hindsight can you see and say, “That was the peak.”

Ibbotson determined that investors can potentially improve the risk-to-reward ratio of a portfolio by adding gold, silver, or precious metals mining shares.

It is not risky to add Gold to one’s portfolio. It lowers the risk!

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