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July 11, 2017, 9:04 a.m. EDT

Gold and platinum are giving the all clear to stock market investors

The gold-platinum ratio is a prescient equity market indicator

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By Mark Hulbert, MarketWatch

CHAPEL HILL, N.C. (MarketWatch) — Odds are favorable that the stock market will rise in the next year.

That good news comes from an unlikely source: the precious metals market. That’s because gold, even though it has struggled of late, has nevertheless been stronger than platinum. As a result, the gold-platinum ratio — which historically has been an excellent stock market indicator — remains close to a 10-year high. (Please see chart, above.)

It was a year ago when I first reported on this ratio and the academic study documenting its impressive performance. The indicator was bullish then, and, as predicted, the S&P 500 Index /zigman2/quotes/210599714/realtime SPX -0.39%  today is higher — 12% higher, in fact.

Believe it or not, the gold-platinum ratio today is just as bullish as it was last summer. If anything, it’s even more bullish: The ratio is 9% higher.

Read: There are plenty of reasons to dump stocks this summer, but here’s why you shouldn’t

The author of this academic study is Darien Huang, a finance professor at Cornell University. In a series of interviews, he explained to me that the gold-platinum ratio is a good stock market predictor because platinum is a purer play on industrial demand than gold. The price of the yellow metal, in contrast, reflects both industrial demand as well as investor demand for a hedge against economic and geopolitical trouble.

So when the ratio is high, as it is now, investors collectively are anticipating a higher-than-average level of risk. Equities, at such times, must deliver a higher-than-average expected return as compensation for that higher risk.

No doubt many of you will be surprised by the bullish message of this academic study, given the bearish story being told by many other academically approved indicators. Perhaps the most prominent of those other indicators is the cyclically adjusted price/earnings ratio, or CAPE, which has been made famous by Yale University finance professor and Nobel laureate Robert Shiller. The CAPE currently is higher (and most bearish) than at any other time since 1880, with two exceptions: Right before the 1929 stock market crash and just prior to the bursting of the internet bubble in early 2000.

But Professor Huang found that, at least since 1975, the gold-platinum ratio has had a significantly better track record than the CAPE of forecasting the stock market’s subsequent one- and five-year returns. In fact, he found the gold-platinum ratio to have a superior track record than any of nine other well-known indicators that researchers previously found to have predictive ability.

That doesn’t guarantee that the market will be higher in 12 months’ time, needless to say. But it’s nice to know that not all academically approved indicators are uniformly bearish.

For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.

/zigman2/quotes/210599714/realtime
US : S&P US
2,986.20
-11.75 -0.39%
Volume: 1.99B
Oct. 18, 2019 5:08p
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Mark Hulbert has been tracking the advice of more than 160 financial newsletters since 1980.

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Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD...

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron’s.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC’s World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What’s Working Now.

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