Emerging Opportunity Over Gold
Dragonfly Capital | Oct 20, 2017 08:32AM ET
When it comes to gold, people do some crazy things. Take the Sultan of Brunei who has a gold-plated aircraft with gold-plated seats. You don’t have to be filthy rich to to do stupid things with gold, though. We put it in alcohol, on our teeth, and it has been a staple in jewelry forever. Investors get crazy about gold, too. Gold coins, gold bars, pundits pitching their gold investment funds, the craziness doesn't stop.
I like to look at gold a bit differently, as a tool for capital management. A place to put money when it is going up and watch as it falls. It also can tell a story relative to other alternatives for your capital. One that looks interesting now is Emerging Market equities. The ratio of the Emerging-Market ETF (NYSE:EEM) to the gold ETF (NYSE:GLD) below shows the story.
This weekly chart shows the ratio back to its peak in 2007. Risk was ‘on’ then, and when it came off in the financial crisis, the ratio fell hard, a flow out of emerging markets into gold. It found a range after the dust settled and has been moving sideways in it ever since. It is now approaching the top of the range. With a strong emerging market sector a break higher could lead to a powerful retracement to the upside. Keep an eye on the 0.40 ratio in this pair.
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