Can smallcaps run further?

June 28, 2024 3 min read

Understanding the Small Cap to Gold Ratio

A very interesting chart recently came to light, showing the ratio of the CNX Small Cap Index to gold. This chart helps us understand how the value of small cap stocks compares to gold over time. From 2004 to 2008, this ratio went from nearly 1 to about 5.5 before collapsing back to 1. Currently, the ratio stands at around 2.8 to 2.9. This tells us that small caps have been much more expensive in the past, and they have the potential to rise further.

Source : Zafar Sheik

Small Caps and Gold Moving in Unison

When we look at the history, small caps and gold have moved in unison. About five, six, or eight years ago, the small caps were at different points, but they always seem to find a balance with gold. This means that the relationship between small caps and gold has remained stable over time. As both have increased together, the ratio chart shows that small caps could potentially rise another 50% from their current levels, assuming gold prices stay the same.

Potential for Growth in Small Caps

The current ratio of small caps to gold suggests that there is room for small caps to grow. Historically, this ratio has reached as high as 5.5, and we are currently near 3. This indicates that small caps are not overvalued compared to gold. If history is any guide, small caps have the potential to increase significantly from their present value without breaching their historical valuation against gold.

One important factor to consider is the flow of liquidity into small caps. If there is a significant influx of liquidity, it can drive small cap stocks higher. With the possibility of rate cuts and renewed stimulus, small caps might experience another rally. This potential for an increase in liquidity could see small caps defying gravity and moving much higher from their current levels.

Comparing Small Caps with Other Asset Classes

To truly understand the value of the small cap rally, it is essential to compare it with other asset classes. By looking at how other assets have performed and the amount of liquidity available, we can gauge the sustainability of the small cap rally. The ratio of small caps to gold provides a useful benchmark for this comparison. It helps us see if the rally is overextended or if there is still room for growth.

Future Outlook for Small Caps

Based on the historical data and current trends, the outlook for small caps remains positive. The ratio chart indicates that there is still potential for growth. While it is important to remain cautious and consider other factors, the possibility of further increases in small caps is supported by historical trends and the current liquidity environment. This suggests that the small cap rally is not necessarily over, and there could be more gains to come.

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    Can smallcaps run further?