Gold and Stocks No Longer Are at Odds

One of the supposed great lessons investors learned in the 1990s was that gold is the antithesis of equities, and vice versa. As gold languished last decade amid a prolonged period of disinflation, the dollar rallied and equities soared, fueling such perceptions. By the end of the 1990s, those bullish on gold and related stocks were unassailably bearish on stocks while those upbeat on shares, especially growth stocks, were dismissive of the yellow metal.

Yet a funny thing happened in the past year: While equities have recovered from their three-year bear market, gold has continued its upward thrust, albeit with more volatility vs. the prior two years. The idea that gold and stocks can't rise together doesn't hold anymore.

Factors attributed to gold's continued rise include the dollar's weakness -- spurred by the Federal Reserve's highly accommodative policies and the Bush administration's deficit-inducing tax cuts, as well as investors' desire to own so-called alternative assets following the three-year bear market and an uncertain geopolitical climate.

After rising 2% to a three-week high of $382 per ounce Tuesday, gold is now up 22.9% in the past 12 months while the Philadelphia Stock Exchange Gold & Silver Index is up over 61%, after rising 4.9% to $96.65 Tuesday. Those returns compare favorably with the more than 16% rise by the S&P 500 and the over 40% gains posted by the Nasdaq Composite and Russell 2000 in the past year. (On Tuesday, major averages continued to either -- depending on one's perspective -- digest or express disappointment over corporate earnings, ending mixed amid relatively modest point moves.)

Heady gains by tech stocks in the past year have made some traders forget about gold and related shares. But these seemingly strange bedfellows should continue to rally in tandem in the coming months, Bernie Schaeffer, senior editor of Schaeffer's Investment Research in Cincinnati, predicted during his keynote address at the San Francisco Money Show last week.

Other presenters at the confab echoed Schaeffer's view. Unlike past years, those bullish on gold weren't necessarily (or automatically) bearish on equities in general. This notion that gold and equities can't work together is another truism of the 1990's -- like "buy and hold" -- that investors ought to re-evaluate.