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Gold at $7800/oz, Or S&P 500 at 220? Take Your Pick

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Nov 9, 2010

The chart below shows yet another way to look at the value of the stock market and gold in relation to each other.

The S&P 500 to gold ratio essentially prices the stock market in terms of gold. (Normally, it is priced in terms of dollars. Alternative reference points could include barrels of oil, acres of land or any other thing of value.) This helps provide a way to evaluate the market adjusting for a loss in purchasing power.

A few observations:

  1. The ratio of S&P 500 to gold reached a bottom in 1981 – i.e. gold valuations reached a peak.
  2. Between 1981 and 2000 the stock market rose in real terms.
  3. Between 2000 and present the stock market lost value in real terms.
  4. The S&P 500 to gold ratio has not yet fallen to historical lows. To reach historical lows set in 1981 the S&P 500 would either need to fall to 220, gold would need to rise to $7800/oz or some combination of the two.

click to enlarge

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This article was posted: Tuesday, November 9, 2010 at 5:22 am

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