Singapore Shares vs. Gold

When you buy commodities, you're selling human ingenuity. - Dylan Grice, SocGen analyst

Over the past 2 years, I have often heard market analysts and investment advisors argue that the stock market is in a bull market on the backs of the strong recovery of the Singapore economy from its crisis lows. Similar arguments have also been made regarding other Asian and emerging economies. Recently, a market commentator from a well-known online fund distribution company even went so far as to say that because the markets stayed resilient in the face of the ongoing EU debt crisis and the Japanese disaster, he was of the view that a new bull market has started.

Since I am of the view that the performance of global markets since Mar 2009 has been due to relentless global central bank liquidity injections (aka QE), I decided to plot the following graph as a sanity check:

This shows the ratio between the EWS ETF listed on the NYSE to the price of gold. I chose the EWS as a proxy for Singapore shares instead of the STI because the latter is denominated in SGD and it would make no sense to calculate the ratio of 2 values denominated in different currencies that are floating against each other.

From the graph, one can see that during the credit crisis, gold outperformed Singapore shares as market participants deleveraged their positions and seek safe-haven assets. From March to August 2009, Singapore shares outperformed gold as they corrected the oversold conditions that occurred during the crisis. From August 2009, we see that Singapore shares, while rising in nominal terms, has stayed relatively stagnant when priced in gold.

What this shows is an arguable case that Singapore shares have been a good inflation hedge relative to gold. However, I believe that it also shows that we are not in a new secular bull market, but a liquidity driven inflationary situation were risk assets can correct should central banks such as the US Federal Reserve decide to slow down quantitative easing.

To further check the validity of my thesis, I downloaded monthly M3 data from the Monetary Authority of Singapore and did a quick year-on-year change calculation, using data from March 2007 to March 2011. The year-on-year change from March 2008 to the present has a minimum value of around 7% and a maximum value of around 12.5%. With this M3 data, I believe that my conclusion of a liquidity-driven stock market rally is a valid one.

Of course, if one looks strictly at nominal values, then the claims of a bull market by mainstream analysts are not wrong. But what's the use of such a 'bull' market when the price of your food and PUB bill keeps going up? It only means that you have to take on more risks in your investments in order to protect your purchasing power against the ravages of inflation. A Pyrrhic victory, in my view.