Econ P.I. is no longer updating the CNF 2 G as it is not core to Econ P.I.'s mission. Hopefully, someone else will continue to examine this important relationship.
|Significance of CNF 2 G values: Historically,when the CNF 2 G is above the transition point of -0.050, the stock market has had above average returns. Bullish periods are more prolonged as the CNF 2 G moves closer to, or above, 0.100.
Caution: Although there is some correlation between up and down movements of the CNF 2 G and the stock market, the main value of the CNF 2 G is its measure of the overall strength of bullish or bearish sentiment.
|CNF 2 G = 0.051 (updated 6/21)
The current month's calculation is based upon weekly averages. Stock and gold prices are actual weekly averages. For the commodity non-fuel price, a basket of commodities is priced weekly to estimate the percent change.
For previous months, the stock price and gold price are the weekly averages for the last week of the month, but the commodity non-fuel price is the monthly average. Normally, there is a two-week lag after the end of a month before the final commodity non-fuel monthly average price is available.
Forecasted values for gold are 40% bullish. 40% neutral, and 20% bearish. Commodity prices are being forecast with no increase through August, which leads to a more conservative forecast. Gold price is the weekly average of LBMA 3pm daily gold price via FRED. S&P 500 index is the weekly average via FRED. Commodity prices are obtained from IndexMundi and the Wall Street Journal.
Econ P.I.’s Commodity Non-Fuel Price Index to Gold Price model (CNF 2 G) correlates well with equity market performance. Based on data since 2001, when the CNF 2 G was equal to or above -0.05, the S&P 500 increased an average of .23% per month (see blue rectangles in chart). When the CNF:G was below -0.05, the S&P 500 decreased an average of -0.11% per month (red rectangles).
In addition, when the CNF 2 G value was near -0.050, the stock market has performed like a roller coaster, with short-term upward and downward trends. On the other hand, prolong periods that were bullish or bearish are signaled by CNF 2 G values that are significantly higher or lower than -0.050. Although the CNF 2 G appears to be a helpful tool for understanding market conditions, like any investing tool, it should be used in conjunction with other quantitative and qualitative measures.
When the CNF 2 G is above -0.050, the S&P 500 performs better than average
This table corresponds to the above chart and summarizes the performance of the S&P 500 when the CNF:G is above and below -0.050. Periods when the CNF 2 G is above -0.050 are in bold.
How Does the CNF 2 G Work?
When the economy grows, the price of a basket of commodities is likely to increase. On the other hand, during times of economic uncertainty, markets become more volatile. Volatility encourages investors to use gold as a hedge against market uncertainty. An index value equal to or greater that -0.05 indicates more movement towards commodities and less towards gold, signaling more confidence in the economy and less fear of market volatility. Consequently, when the CNF2 G is equal to or above -0.05, the equities market should perform better than when the index is below -0.05. The CNF 2 G compares the relative change in prices between nonfuel commodities and gold over a 52-week period.