Is Gold Cheap?

To answer the question you need to know what you are measuring it against. Cheap compared to what? Let’s compare it to the world’s current favourite asset…stocks.

Stocks are at their all-time highs. Has the stock market topped out? I think so but I have been wrong for some time now. One thing I can say with some certainty is that relative performance makes this a good time to consider switching a little of your holdings from stocks to gold. You be the judge.

In the 10-year chart below, you can see the gold-to-S&P 500 ratio. When the ratio is at 1, one ounce of gold could be exchanged for one unit of the benchmark S&P 500 Index. As the line rises, gold increases in value relative to stocks. (Gold is outperforming stocks). As the line falls, gold loses value relative to stocks. (Gold is underperforming stocks.) Today, gold is trading at around $1,250 per ounce…about half the value of the S&P 500, which is trading around 2,470. So today (July 21, 2017), the gold-to-S&P 500 ratio stands at about 0.5 ($1,250 divided by 2,470). As you can see, that’s around its late 2016 low…

At the most basic level, this chart shows us that gold has dramatically underperformed stocks since 2011. This chart also tells us that gold is cheap relative to U.S. stocks. Over the past 10 years, the ratio’s average is 0.85. Going back further, over the past 20 years, the ratio’s average is 0.59. And over the past 40 years, the ratio’s average is 1.21. So at 0.50, gold is cheap relative to stocks. Is it time to consider a little diversification? It seems to me that there is very little downside risk in gold compared to stocks.

But, dear reader, you could decide to double up on US stocks because they are performing so much better than gold. You know, buy momentum after nine years of going up and hope that trees actually do grow to the sky. Believe me when I tell you that’s the risky move, not the safe one.