Thread: PM inverse relation to stocks

What! Stocks are going to rally back for the next 3-4 years?

I got to get on this newsletter you guys are on!

I think it's an interesting theory that PMs and stocks move inversely. And perhaps the experts can point to a few cases where this was true. But I know of no cause and effect relationship that would necessarily ordain that this must happen or that it is even likely to happen. When there are very high rates of inflation, both will probably rise, although at different rates. Where there is severe deflation, both will probably fall. I don't think the theory has any predictive value.

Originally Posted by Blueindian65

well 4 years might of been an overstatement, but with the sap at a 60 year high on the value scale it surly has to go up, Hell look at Brusnwick people are buying boats again and boats are the lagiest of laging indicators

I would venture to guess that people are buying boats now to save on the extra taxes later

Considering that gold has had governmental intervention for such a period its hard to show a true relationship. However, since 1972 there hasn't been any direct evidence of a inverse relationship between the two. Gold mining stocks tend to have an extremely low beta correlation, so it is true that the gold mining stocks are a good hedge to stocks. However, the metals themselves tend not to. I would imagine this is due to the relative stickiness of the metal trading market versus stocks. Overall metals has a lower correlation to stocks than some other financial instruments, but not any more so than other commodities, and not an inverse relationship.

If the stock market takes off because the economy is getting better then I think that silver, platinum, and palladium will rise. They will rise because their industrial demand has picked up. Gold is a toss up.

Originally Posted by Fifty

If the stock market takes off because the economy is getting better then I think that silver, platinum, and palladium will rise. They will rise because their industrial demand has picked up. Gold is a toss up.

Great insight, that is the half of the equation that most PM investors overlook. Yes, with increased economic activity demand for commodities go up, so this aspect of the relationship is a direct positive relation to stocks. However, the part that most PM investors know is that during bad times people flock to the safety of PM's. The way these two types of demand intertwine is the complicated part, resulting in a non-inverse and non-direct relationship between stocks and PM's.

The reason mining stocks have more of an inverse relationship to stocks is that during good times even if demand is up they have higher costs to extract. In worse times, it is assumed it is easier for them to keep costs down while still selling the metal for a premium. Hence, if you believe the Miner has the ore to extract, Mining stocks are actually a better stock hedge. One caveat, since this is widely known, mining stocks inherently have a higher premium versus earnings than normal stocks, since this relationship is valuable to balance portfolios. Therefor, only investing in mining stocks will result in poorer performance, unless the economy truly does "crash and burn".

Chris

I think it's an interesting theory that PMs and stocks move inversely. And perhaps the experts can point to a few cases where this was true. But I know of no cause and effect relationship that would necessarily ordain that this must happen or that it is even likely to happen. When there are very high rates of inflation, both will probably rise, although at different rates. Where there is severe deflation, both will probably fall. I don't think the theory has any predictive value.

I have to agree. I don't invest in PM's for good reasons, but I do watch them and have not noticed any correlation between the two as far as rising and falling. If that were the case I wouldn't have seen my stocks increase over 40% in value the last 8 months.
Guy~

I think the fallacy here is believing that people flock to PMs during times of uncertainty. They actually flock to the almighty dollar bill. So, when the markets turn down, everything gets sold, stocks, gold, silver, everything, as people flock to acquired dollar bills. Look at the 2008 crash for guidance, or at the Greece debt crisis.