Fears of Double-Dip Recession Send Investors to Seek Refuge in Bullion

NEW YORK (Reuters) – Mounting fears about a double-dip recession and a U.S. government debt crisis prompted equity investors to seek refuge in bullion, sending the Gold/S&P 500 ratio to its highest in 23 years this week.

The ratio, calculated by dividing the price of an ounce of gold by the S&P 500 index , has traded in a range between 1 and 1.2 from January 2010 to June 2011. In the past four weeks it climbed nearly 50 percent, hitting 1.6 on Wednesday, the highest since September 1988.Heightened economic uncertainty around the globe suggested the divergence between safe-haven gold and equities –considered a riskier asset — has room to widen further, analysts said.

“If we are going to enter another period of massive economic slowdown, one would have to expect risk assets and the S&P to underperform gold as well,” said Adam Sarhan, CEO of Sarhan Capital, a consultant to institutional investors.

The anticipation of dire economic events, such as the Standard & Poor’s downgrade on U.S. Treasury debt last Friday, default by a euro zone country or problems in the European anking sector, prompted investors to favor gold at the expense of riskier assets.

“Right now, with the dollar and euro in trouble – people are talking about the euro failing. If you have a ‘black swan’ type event with a major currency, people are going to flock toward gold,” said Sarhan, using a term for a low-probability economic shock that catches markets unprepared.

Some daytraders are reaping big returns from this week’s extreme volatility, by betting on exchange-traded funds such as the FactorShares 2X: Gold Bull/S&P500 Bear ETF , which ‘double-short’ S&P futures and ‘double-long’ gold prices.

On Friday, the ratio fell back to around 1.5.

Daniel Hwang, senior currency strategist at GAIN Capital’s FOREX.com, said that a possible third round of quantitative easing by the Federal Reserve could boost both gold and equities at the same time.

“My opinion is for the S&P at that point to outpace gold again as investors pull out of safety and chase higher yields in equities that are being supported by central-bank policy actions,” Hwang said.

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