Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Ratio of Gold Price to Stock Market

Commodities / Gold and Silver 2010 Jun 21, 2010 - 11:10 AM GMT

By: Ned_W_Schmidt

Commodities

Best Financial Markets Analysis ArticleAs anyone that has bought and sold a house in the past few years can attest, value is indeed neither fixed nor necessary reliable. Valuing a house, or any other asset, is as much science as carving up a chicken in the moon light at midnight with precision surgical instruments. The tools, such as present value, are precise mathematical calculations. However, the inputs border on being sorcery.


Valuation of Gold is in that realm of semi sorcery, but it still is an essential task for the investors.  Numbers being tossed to investors of $5,000 based on a nonsensical calculation of the last high adjusted for some mythical inflation measure serve no purpose. The lack of science overwhelms the  precision of the calculation. Likewise, absurd forecasts of $10,000 in the near future serve to delude some into thinking that if they do not buy Gold and a news letter today they are without hope.

Valuation does give us some kind of investment framework within which to invest, and to do so it must be somewhat pragmatic. It must also challenge our opinions of the markets. Under valuation or over valuation do not make markets go up or down. They do, however, serve as yellow flags. Valuation in 1999 said the price of Gold was ridiculously low, and should be bought. That under valuation did not make Gold go up. It did serve to say that the widespread opinion in the financial and economic community that Gold was a historic anachronism was utter nonsense.

Our fist chart, above, is of the ratio of the price of $Gold to the S&P 500 at the end of each year since 1945.  With almost 66 years of data it may not be a perfect measure, but it certainly is a reasonable start. Solid black line is the average of that ratio over 66 years. Line of green circles is that average plus one standard deviation. Probability of a data point above the green line is less than 1 out of 6. An investor can quickly with calculator determine that both the $5,000 and $10,000 predictions border on the near impossible. That blue dot is the current position of our $1,760 long-term target.

The calculations in that chart allow some valuation of both $Gold and U.S. paper equities. That has been done in the following table. In short, $Gold and U.S. paper equities seem fairly valued in relation to each other. Based on the long-term value, neither is a buy at this point. However, a continued advance in the price for $Gold would begin tipping the scale toward paper equities. However, remember these calculations are only yellow flags. The data does allow for a further advance of $Gold over time.
                 

VALUATION
DATA PERIOD: 1945 TO PRESENT

If S&P 500 = 1118

$Gold should  = $1,318 + 5%

If $Gold = $1,257

S&P 500 should = 1,066 - 5%

As we possess no clay tablet dictating the proper data history for the first graph, we created the second chart, above. It is the ratio of the price of $Gold to the S&P 500 for the past 22 years. Here we find a far different picture. Only two times in this current era has the ratio been higher than it is at the present time.

Using the data in that second chart we created the valuation data in the following table. Here the situation looks for more attractive for paper equities rather than for Gold. Reality will be obviously somewhere between the two outlooks. We can, however, easily dismiss some projections that clearly do not fit any of the data.

VALUATION
DATA PERIOD: 1989 TO PRESENT

If S&P 500 = 1,118

$Gold should  = $ 636 -49%

If $Gold = $1,257

S&P 500 should = 2,208 +98%

Valuation is often similar to the old story about three blind men attempting to describe an elephant.
None will develop the correct description of the shape of the elephant. They will, however, be able to eliminate a lot of the possibilities. It has no feathers. None find fins. No horns are reported.  Finally, let valuations and forecasts serve you. Let not you serve valuations and forecasts.

Ned W Schmidt CFA, CEBS

To subscribe to The Value View Gold Report use this link: www.valueviewgoldreport.com

RHODIUM TRADING THOUGHTS is published presently on an irregular basis, and is available only at our web site: www.valueviewgoldreport.com

To receive THE VALUE VIEW GOLD REPORT click on a link at bottom of one of pages, or send check(US$149) or credit card information to: Schmidt Management Company, 13364 Beach Blvd. Suite 812, Jacksonville FL 32224. Fax orders can be sent to 215-243-7161. Our phone number to place an order is 352-409-1785. Subscriptions cannot be cancelled or refunded.

Copyright © 2010 Ned W. Schmidt - All Rights Reserved

Ned W Schmidt Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in