Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
Will US Government Shutdown Cause The Stock Market To Crash? - 18th Dec 18
The Coming Financial Storm - 18th Dec 18
Jeff Gundlach thinks that a Stocks Bear Market has started. Is he Right? - 18th Dec 18
Gold’s Not An Investment – You Won’t Get Rich - 17th Dec 18
Stock Market At Medium-Term Lows, Which Direction is Next? - 17th Dec 18
This Stock Will Drive America’s 5G Buildout - 17th Dec 18
Stock Market Turn In The Tide - Have a Happy Bear Market! - 17th Dec 18
How A NASA Scientist Could Trigger The Next Cannabis Boom - 17th Dec 18
iShares Russell 2000 IWM Leading Stock Market Decline - 17th Dec 18
Where is the Dow Stock Market Santa Rally? - 17th Dec 18
With Weaker Climate Consensus, Expect Elevated Climate Change - 16th Dec 18
SMIGGLE Advent Calendar 2018 UK Contents - What You Get Look Inside Review - 16th Dec 18
Is there a Lump of Coal in Santa's Stock Market Bag? - 16th Dec 18
This Market Will Drive Gold in 2019… - 16th Dec 18
Gerald Celente:Central Banks Can’t Stop a 2019 Debt Disaster - 16th Dec 18
Gold Stocks Triple Breakout - 15th Dec 18
The stock market fails to rally each day. What’s next for stocks - 14th Dec 18
How Low Could the S&P 500 Go? - 14th Dec 18
An Industrial to Stock Trade: Is Boeing a BUY Here? - 14th Dec 18
Will the Arrest of Huawei Executive Derail Trade War Truce? - 14th Dec 18
Trump vs the Fed: Who Wins? - 13th Dec 18
Expect Gold & Silver to Pullback Before the Next Move Higher - 13th Dec 18
Dollar Index Trends, USDJPY Setting Up - 13th Dec 18
While The Stocks Bulls Fiddle With The 'Fundamentals,' Rome Burns - 13th Dec 18
The Historic Role of Silver - 13th Dec 18
Natural Gas Price Setup for a Big Move Lower - 13th Dec 18
How to Get 20% Off Morrisons Weekly Supermarket Shopping - 13th Dec 18
Gold Price Analysis: Closer To A Significant Monetary Event - 13th Dec 18
Where is the Stock Market Santa Claus Rally? - 12th Dec 18
Politics and Economics in Times of Crisis - 12th Dec 18
Owning Precious Metals in an IRA - 12th Dec 18
Ways to Improve the Value of Your Home - 12th Dec 18
Theresa May No Confidence Vote, Next Tory Leader Betting Market Analysis and Forecasts - 12th Dec 18
Gold & Global Financial Crisis Redux - 12th Dec 18
Wow Your Neighbours With the Best Christmas Projector Lights for Holidays 2018! - 12th Dec 18
Stock Market Topping Formation as Risks Rise Around the World - 11th Dec 18
The Amazing Story of Gold to Gold Stocks Ratios - 11th Dec 18
Stock Market Medium term Bullish, But Long Term Risk:Reward is Bearish - 11th Dec 18
Is a Deleveraging Event about to Unfold in the Stock Market? - 11th Dec 18
Making Money through Property Investment - 11th Dec 18
Brexit: What Will it Mean for Exchange Rates? - 11th Dec 18
United States Facing Climate Change Severe Water Stress - 10th Dec 18
Waiting for Gold Price to Erupt - 10th Dec 18
Stock Market Key Support Being Re-Tested - 10th Dec 18
May BrExit Deal Tory MP Votes Forecast, Betting Market Analysis - 10th Dec 18
Listen to What Gold is Telling You - 10th Dec 18
The Stock Market’s Long Term Outlook is Changing - 10th Dec 18
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

Is Gold Under or Overpriced?

Commodities / Gold and Silver 2018 Nov 17, 2018 - 11:32 AM GMT

By: Arkadiusz_Sieron

Commodities

Have you heard about the Everything Bubble? Some analysts believe that after the dot-com bubble of the 1990s and the housing bubble of the 2000s, we are in the middle of a price bubble in virtually all asset classes simultaneously caused by the Fed’s unusually easy monetary policy with ultra low interest rates. Although we agree that the US central bank maintained federal funds rate too low for too long, the narrative about a dangerous bubble inflating in a wide variety of countries, industries, and assets does not make sense. The bubble means that the price of an asset deviates from the fundamental value, increasing excessively, to a much greater extent than on other markets. It should be now clear that the existence of overvalued assets necessarily means that other assets are undervalued, so there can’t be the ‘everything bubble’. Sorry, but those who wait for the total asset apocalypse might be disappointed.


OK, but what about gold? Is its price too low or too high relative to stocks and bonds? Let’s examine it and find out who is right: gold bulls or bears? The chart below displays the ratio of gold prices to the S&P 500 Index.

Chart 1: Gold to S&P 500 Index ratio from April 1968 to September 2018.

As one can see, the ratio is now around 0.41, which is rather low. The historical average amounts to 1.14, almost three times higher. It may indicate that gold is significantly underpriced compared to US stocks. However, let’s note that the inflationary decades of 1970s and 1980s strongly affect the results. Gold enjoyed a tremendous bull market in the 70s and early 80s., as the next chart shows. When we remove that period from the analysis and start from the 1990s, the average drops to 0.64 – still higher, but not so much. The chart below also suggests that the current low level of gold-to-stock ratio results not from mediocre gold prices, but rather from elevated stock valuations.

Chart 2: Gold prices (yellow line, right axis) and S&P 500 Index (red line, left axis) from April 1968 to September 2018.

And what about bonds? Let’s look at the chart below. As one can see, gold now seems to be overpriced relative to bonds. The historical average is 5.44, while the current reading of the ratio amounts to 12.36.

Chart 3: Gold to 10-Treasuries ratio from April 1968 to September 2018.

The next chart displays the gold and 10-Treasuries prices (quoted as 100 minus the yield). It suggest that although the bond prices are quite high, the gold prices are relatively elevated due to the amazing rally in the 2000s.

Chart 4: Gold prices (yellow line; right axis) and bond prices (red line; left axis; 100 minus yield) from April 1968 to September 2018.

So we have contradictory indications. However, investors should remember that all comparison to bond prices have limited use, as bond prices are quoted as 100 minus yield. It means that while the prices of other assets will increase over time, the bond quotes will be not very distant from their face values (there is pull to par).

But, as we mentioned at the beginning, one can argue that we are in “everything bubble” and all financial assets, or at least both stocks and bonds, are overvalued. So let’s compare the yellow metal to houses, which are another tangible and alternative asset class. The next chart points to the ratio of gold prices vs. home prices, reflected by the Private Housing Construction Price Index from 1968 to 1974 and S&P/CoreLogic/Case-Shiller US National Home Price Index from 1975 to 2018 (both data series came from Robert Shiller’s online database).

As one can see, the current value of the ratio, 6.62, is above the historical average, i.e., 5.48, which could suggest that gold is a bit overvalued relatively to property prices.

Chart 5: Gold to Home Prices (Gold to Private Housing Construction Price Index ratio from April 1968 to December 1974 and Gold to S&P/CoreLogic/Case-Shiller Home Price Index ratio from January 1975 to May 2018).

However, investors should remember that we had the housing bubble in the early 2000s, which means that the average would be higher, if the real estates were not artificially propped up. As the next chart shows, when the bubble burst, gold shined. But the real estate has outperformed gold since 2012 due to the economic recovery and increased risk appetite.

Chart 6: Gold prices (yellow line; right axis) and home prices (red line; left axis; PHCPI and S&P/Case-Shiller) from April 1968 to May 2018.

The key takeaway is that gold seems to be underpriced when compared to the US stocks, while overvalued when compared to the American real estates (and perhaps bonds as well, but this comparison is less conclusive). What does it imply for the gold outlook? Well, not as much as you might think. The reason is that the regression toward the mean does not fully apply to the gold market – at least unless someone considers the price of gold as the resultant of completely random events. We prefer a casual-realistic approach, which pays attention to broad macroeconomic context, to simple mechanistic one, which focuses solely on data series.

In other words, what really matters is the reason for high share prices compared to other assets, including gold, and it’s low interest rates. In such macroeconomic environment, stocks are simply more attractive than bonds. Now, yields are rising, which may hit equities, which are dangerously lofty relative to gold or home prices. But does it mean that investors will turn to the bullion? Not necessarily, as coupon-bearing bonds will look more attractive. Higher demand for US Treasuries, strengthened additionally by problems of some emerging markets, would support the greenback and be a headwind for the yellow metal.  

Thank you.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2018 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

6 Critical Money Making Rules