Gold Investors Watching Bank Stocks

Gold Investors Watching Bank Stocks  

A healthy financial system is generally not a positive for gold. Rising investor confidence in banks typically runs in parallel with greater risk tolerance and less interest in gold, which is the preferred home for the risk averse.

At the start of this year, several major banks published 2016 'conviction buy' recommendations for large US banks based on the common wisdom that rising interest rates (the Fed had raised rates on December 16 for the first time in nine year) are good for banks because rising rates increase interest rate spreads which are a key factor behind growth in bank profits. Just eleven days later, many of these recommendations were rescinded. Why? Because bank stocks are significantly underperforming equities generally.

The best way to measure bank stock performance against general equities is to use the ratio of bank stocks to the S&P500. The following five year weekly chart traces the ratio of BKX, a US bank stock index, to SPX, the index of the S&P500 large cap index. Note that the ratio has recently broken down well below its 50 and 200 week moving averages. We believe this may be an early warning that confidence in the financial system is under threat.

Is the BKX:SPX ratio a useful predictor of the gold price? We think it is, as the following chart indicates. Once again, this is a five year weekly chart with the ratio as the red line and the gold price as the black line. When gold hit its highs in 2011, the bank stocks were struggling in the face of the European debt crisis, the US debt ceiling impasse and rising fears of default. The ratio then went straight up for two years, which not coincidentally turned out to be two of the worst years ever for gold. Although it is too early to say for sure, we may now be headed in the opposite direction.