Gold is the perfect anti-asset…anti-stocks, anti-bonds and anti-financial assets generally. When financial assets are strong, gold is generally weak and vice versa. When financial assets are highly valued, the smart contrarian play is to sell financial assets and buy gold. When gold is relatively highly-valued, the smart play is to sell gold and go long stocks. The correct measure is the relative value of these assets.
Let’s look at history. In January 1980, when gold hit $852 per ounce (an all-time high in inflation-adjusted terms of roughly $2,400), the ratio of the Dow to gold was 1.3. In other words, a unit of the Dow bought 1.3 ounces of gold. During the Great Depression, the Dow bought 1.9 ounces. That compares to a high of 44 in 1999 when gold reached lows of $250 an ounce while the Dow soared. When the nominal price of gold hit a record high above $1,900 in August 2011, the Dow to gold ratio was 6.4.
So, where are we now? The Dow to gold ration has more than doubled since 2011 to nearly 15. That means that despite its exceptional move in early 2016, gold is still cheaper in relative terms than it was for the 24 years between May, 1972 and September, 1996. On a relative basis, it’s the cheapest it has been since December, 2007. The conclusion? Sell stocks and buy gold.
Note: the above chart of the Dow/Gold ratio is log-based.