Stocks vs. Gold Prices

Chart of the Week for December 9-15, 2005

Recent weeks have shown interesting movements in the markets. The Dow Jones Industrial Average, also referred to as the Dow, a common measure of stock performance, has come close to breaking the 11,000 mark. This follows an upbeat assessment of the U.S. economy by Federal Reserve Board Chairman Alan Greenspan. Reaching the 11,000 mark will be a psychological breakthrough for investors, and is a reflection of the underlying strength of the economy. Gold prices also burst through an eighteen year high, topping the $500 per ounce mark. Although history has shown us that this price is not sustainable, it is nevertheless a milestone.

The rise in gold prices has come at a time when equity markets are performing well and the dollar is at long-term highs against the euro and yen. This is unusual; historically, gold prices rise when equity markets underperform, as gold has served as a hedge against a declining dollar. Additionally, gold prices are impacted by speculative trading. Although these numbers give investors reason to cheer, it is important to put them in perspective. The economy and the markets are cyclical. Diversification is an investor’s best friend: helping to ensure that we capture market gains, while keeping us relatively insulated from market lows.

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