Investors will abandon stocks and continue to chase gold over the next few years, based on an analysis of the spot gold to S&P 500 .SPX ratio, Reuters market analyst Wang Tao said.

The current ratio is about 1.6, worked out after dividing the gold price by the value of the index, and will rise to 3.72 over the next one or two years, according to Wang's prediction.

The forecast is based on a Fibonacci retracement analysis, a technique employed by market technicians split the difference between a market high and low at a few key levels such as 0.382, 0.50, and 0.618.

The market tends to rebound or correct to such levels after the development of a trend, Wang said.

The gold to S&P 500 ratio touched a historical high of 7.25 in 1980, and a low around 0.19 in 2000 based on a monthly chart.

A long-term uptrend has started from 0.19 and the ratio is heading toward 3.72, the 50 percent Fibonacci retracement, with an upside potential extended to 4.55, the 61.8 percent level, Wang said.

The implication is gold may reach about $2,400 per ounce, while S&P may collapse to about 600, given the current diverging moves of the two.

Wang said these two levels are based on the individual chart patterns of the metal and the index.

BULLISH ON GOLD

Employing the Elliott wave theory as his main analysis tool, Wang labeled the current rally of gold as a wave "C," which is the second upward leg of a long-term bull run that started at the 1970 low of $34.95.

"Based on a Fibonacci projection analysis, the wave "C" would travel to $2,345, the 261.8 percent level, as gold has successfully cleared a pivotal resistance at $1,545, the 161.8 percent level," Wang said.

The strong bullish momentum built in the successive rallies over the past five weeks could have well confirmed gold is riding on a fifth wave, he said, adding that the wave "C" is normally made of five waves, among which the fifth wave is the fiercest.

NIGHTMARE FOR STOCK INVESTORS

For the analysis of the S&P, Wang classified the current sharp drop a big wave "C," which is a continuation of a fall that started from the 2007 high of 1,576.09.

Wang said the whole cycle could have adopted an "A-B-C" wave mode, adding that the subprime debt issue in 2008 only quickened the completion of the wave "A," while the current wave "C" could travel beyond the trough of the wave "A," which is at 666.79.

"The nightmare for stock investors is yet to come, and the past few weeks massive sell-off is just an appetizer compared to the future meltdown," Wang Tao warned.

The question now is whether the ratio would eventually climb to 7.25, a high hit in 1980, when gold peaked at $835, while S&P faltered around 110 on a monthly chart.

Wang said that might be possible.

"A ratio of 7.25 would need gold to climb to about $4,000, which is slightly above $3,744, the 461.8 percent Fibonacci projection level of the current wave C target," Wang said.

He pointed out that a small wave "c" of the wave "A" did travel 4.618 times the length of the wave "a" in 1980, and that ratio may be repeated under the present scenario.

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