Hold Stocks and Sell Gold - a Really Dumb Idea

By: Ned_W_Schmidt

Above chart demonstrates in part why Goldman Sachs recommendation to sell Gold, and presumably to continue holding equities, may be another one of the dumb ideas out of their commodity research. Plotted in that chart is the end of year ratio for the price of $Gold to the S&P 500 since 1945. Most recent bar is for the current value of those assets.

Black line is the average of that ratio back to 1945. In 20+ years that ratio has only been above the average at year end one time. That was in 2011 when $Gold had risen to $1,900. Now the ratio is back below the average, and that has some strong implications for the relative value of $Gold and paper equities. Last time the ratio was this low was in 2008.

Using that ratio and the current values for $Gold and the S&P 500 we can calculate possible implications for each. Bottom chart portrays the results of such calculations. Given the value of $Gold, the S&P 500 is over valued by ~25%. Given the current value for the S&P 500, $Gold is under valued by more than 30%. Reality will be somewhere in between, but likely result in $Gold performing better than the S&P 500 in the year ahead.

One needs to consider how the markets came to be so far out of equilibrium. To do that consider the popular thinking in the markets today.

Given that the Federal Reserve is going to continue QE,
U.S. stock market can only go higher.

Given that the Federal Reserve may slow, or stop, QE,
Gold should be sold.

Readily obvious is that a serious inconsistency exists in the thinking of the Street, a not unusual condition. One of these views is clearly wrong. As the U.S. Federal Reserve continues to be ineptly managed by the bumbling Keynesians, selling Gold is the wrong recommendation.

When major brokerage firms are capitulating on Gold, investors should take advantage of their long record of dubious forecasts. When panic selling by teenage fund managers is readily apparent in the Gold pit, the time for buying has arrived. A lot of heavy mental exercise, something the Street seems largely incapable of, is not required. Buying Gold and selling stocks is more likely the right

By Ned W Schmidt CFA, CEBS

Copyright © 2011 Ned W. Schmidt - All Rights Reserved

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. To receive copies of recent reports, go to www.valueviewgoldreport.com

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