Week 33, 2011: Gold vs. Stock Prices

Summary: A fortnight on from our last chart, and the economic news is still focusing on the stock market. The continuing decline in stock prices is pushing up gold prices even further.

What does the chart show? Measured against the left hand axis is the FTSE 100 index in red, the index of the top 100 stocks on the London Stock Exchange. This number is the daily adjusted close, meaning that it is the index price at the end of each day, adjusted for dividends and splits. This is not very different from the regular close price over this time period. Measured against the right hand axis is the price of gold in blue. This number is the daily spot price of gold on the London market, in pounds sterling per ounce.

Why is the chart interesting? As we mentioned back in Week 16, the price of gold is a good indicator of investor perceptions of the prospects for the global economy. as it is traditionally seen as a safe place to store your wealth. High prices indicate that more people are trying to put their wealth into holdings of gold.

Gold prices have been rising steadily since February, when it was over £300 cheaper per ounce than it is today. While this price increase has been going on for a long time, it has undoubtedly accelerated since the beginning of August when the stock market dropped almost 1000 index points in just one week. It certainly looks like investors are transferring their wealth from stocks to gold. However, gold is not immune to price crashes either, and the current price seems unsustainable.