In a ratio one asset could move more than the other…[and, given the fact that] by almost any measure the stock market is overvalued, and history shows that gold tends to rise in most stock market crashes, the most likely scenario is that gold rises and stocks fall – and probably dramatically.
Gold STILL Cheap Relative to Stocks
Gold rose 19% in 2019, and 24% in 2020 yet those consecutive annual gains did little to improve its ratio to the broad stock market
…You can see the peaks this ratio has hit before. To reach some of those prior highs it would have to rise:
- Nearly 3x to match the 2011 high of 1.67
- Almost 6x to match the 1974 high of 2.93
- And over 17x to reclaim the 1980 peak of 7.58!
Since it’s a ratio one asset could move more than the other…[and, given the fact that] by almost any measure the stock market is overvalued, and history shows that gold tends to rise in most stock market crashes, the most likely scenario is that gold rises and stocks fall – and probably dramatically.
…The following tables show what would happen to the prices of gold and the S&P 500 if the three ratios above were to hit from current levels. To keep it simple, the tables are calculated from 4,200 for the S&P and $1,750 for gold.
First, if the ratio returned to its 2011 high of 1.67, here are the various prices gold and the S&P 500 could see.
In most scenarios where gold logs a gain, the S&P 500 would experience significant losses. Only at a five-figure gold price would the S&P see a gain at this ratio. Even if gold fell to $1,000, the S&P would lose almost over 85% of its value. While this scenario is pretty sobering, it only gets worse for stock investors…
Here’s what gold and S&P prices would look like if the ratio matched its December 1974 high of 2.93.
At no gold price in the table do stocks see a gain. The difference between the two asset classes couldn’t be more stark. Clearly gold will win and stocks will lose in the ratio scenario.
Here’s the biggie, a rematch of the early 1980 ratio of 7.58.
This would be an ugly outcome for any diehard stock investor. Even if gold soars to $10,000, stock investors would see their portfolio lose over two-thirds of its value.
…Given where the ratio currently sits, the odds of it moving significantly higher are indeed very high. When the gold/S&P 500 ratio reverses, stock losses will mount and gold’s gains will grow. Based on history the moves will probably be substantial for both sets of investors.
For investors that have no exposure to gold, you have to consider what would happen to your stock portfolio when (not if) this ratio begins to reverse…and given that stocks don’t stay in bull markets forever, and that gold is deeply undervalued relative to stocks and is highly likely to rise when they reverse, might it be wise to allocate a portion of your portfolio to gold now?
If you don’t buy gold now…a wealth transfer is coming, and you’ll either be a victim or victor and, given where this ratio sits, gold investors are destined to be the victors.
Editor’s Note: The above version of the original article by Jeff Clark, has been edited ([ ]) and abridged (…) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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