SPX and Gold Correlation

In the old days, with the Standard & Poor’s 500-stock index down 1.75% through midday, chances were pretty good that gold prices would find a “safe haven” buying bid. That was then. This is now. Instead, gold prices were also down, off about 0.6%.

The link these days is the dollar, and the correlations between the dollar and other assets is creating strange bedfellows such as stocks and gold prices moving in the same direction.

Those correlations have continued to tighten in recent weeks. In the first eight months of the year, gold prices, as measured by the SPDR Gold Shares exchange traded fund, had a negative 30% correlation to the dollar, according to Macro Risk Advisors. In October and November, that correlation was up to negative 56%. The correlation between the S&P 500 and the dollar jumped to an astonishing -87% from -41%.

Macro Risk Advisors’ Dean Curnutt says there have also been some subtle differences in the options market that bear watching.

Traditionally, options prices for gold have been biased toward a greater risk of a sharp rise in prices than would be the case on other investments, Curnutt says. The idea being that investors would use those positions as a hedge against a significant spike in inflation. Now, they’re not only factoring in much slower increases but also, there has been more demand for puts that provide downside protection.

Of course, that could reflect the fact that gold has had a big rally, and some many be now protecting themselves against a reversal. However, Curnutt thinks it could reflect a more fundamental change. Gold is being priced “more akin to something like a traditional risk asset like the S&P 500,” he says. “That doesn’t mean the market isn’t pricing for the risk that gold can move up quickly, but less so.”

To take that one step further, if stocks go into a big decline gold might decline as well. “These risk assets – gold, commodities and S&P could move down … in a very correlated fashion,” Curnutt says.

Manulife nicely valued

Manulife Financial Corp. has been upgraded to Outperform from Sector Perform by RBC Capital Markets.

"While we believe that Manulife will not earn the same kind of ROEs as it has in the past and that the volatility of its earnings shoud be greater than in the past, we believe that the stock's valuation more than reflects that reality and that the worst is behind in terms of earnings surprises, based on current equity market levels and interest rates," Andre-Phillipe Hardy, RBC Capital Markets analyst said in a note to clients.

Mr. Hardy said Manulife was trading at 9.9x estimated 2010 earnings, compared to a range of 10.1x to 11.1x for its three lifeco peers. On a normalized earnings basis, Manulife is also nicely valued, trading at 9.8x versus 9.2x to 10.8x for its peers.

"Those are attractive valuation levels compared to history as the company used to trade at a premium P/E valuation," the analyst wrote.

Over the past eight months, Manulife shares have risen almost 130% from a low around $9 in March. Now trading at roughly $20, they still remain half their value at the peak in April 2008.

Mr. Hardy reduced his price target on Manulife shares from $27 to $26.