Chart of the Week: S&P500/Gold ratio

S&P 500/Gold ratio
click for larger graph


Source: Chart of the Day

The chart above was created by dividing the S&P 500 by the price of one ounce of gold. This results in what is referred to as the S&P 500/gold ratio or the cost of the S&P 500 in ounces of gold.

Chart of the Day notes "it takes 2.45 ounces of gold to “buy the S&P 500.” This is considerably less that the 5.53 ounces back in the year 2000. When priced in gold, the 2002 to 2005 stock market rally didn’t amount to much. In fact, the short-term trend is down and nearing the 2003 lows."

UPDATE January 9, 2005 12:21pm

A commentor references these charts below as showing very similar the long term ratio cycles to our 100 year Bull/Bear Cycles(Click for larger graphics)



Source:  The Golden Constant Steve Saville, 26 Jul, 2005

As Saville makes clear, "an ounce of gold today is the same as it was 5000 years ago and the same as it will be in 5000 years time;" However, Corporate earnings, paper money, treasuries are all subject to a variety of other factors. Hence, the relative importance data priced relative to a nonfluctuating basis, such as gold. (One caveat: total mined tonnage of gold continues to rise, so supply is an issue).

Nice find!


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Quote of the Day

"America’s once mighty job machine is struggling as never before.  The combination of subpar job creation and real wage stagnation puts extraordinary pressure on the income-generating capacity of the world’s most aggressive consumer.

Of course, you’d never know that from the spin that followed the release of the latest monthly labor market surveys of the US Bureau of Labor Statistics. From Washington to Wall Street, the verdict was nearly unanimous — all is fine on the US labor market front 

Nothing could be further from the truth."

The End of Labor
Stephen Roach, Morgan Stanley

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What's been said:

Discussions found on the web:
  1. royce commented on Jan 9


    Since you’ve post the chart, could you explain the significance you’re putting on that ratio? I don’t know what I’m supposed to take away from it.

  2. Barry Ritholtz commented on Jan 9

    me neither — i just thought it was interesting

  3. Hans van Deun commented on Jan 9

    I don’t think there’s much you can learn from this chart – other than that gold rallied more than the s&p 500. I’m sure you could find another commodity that decreased tremendously in price in 2000-2002 (more than the s&p), and then use that particular ratio to say that the spectacular dotcom bust wasn’t a bust at all. It’d be equally meaningless.

  4. B commented on Jan 9

    About the only thing to take away from it is you should have bought gold instead of stocks.

    If you look back 100 years, these types of trends tend to last for a long time. ie, The good ole commodity driven boom of the 70s had a similar chart. As Barry has shown many times, the equity markets didn’t make a new high throughout the 70s.

    Historically, there are two types of growth environments. Weak dollar or commodity driven booms such as we are in right now and were in in the 1970s and strong dollar or financial driven booms which are disinflationary. That would be 80s-2000. ie, The good kind.

    The underperformance of equities is showing a historical consistency that may hold true for many years or may not. It is definitely consistent with Barry’s projection of a lower Dow in 2006. And given the huge divergence between gold and long term rates, something is going to break here. Historically, this divergence has, with nearly 100% accuracy, meant higher long bond rates within a twelve to fourteen month window of gold’s blow off or peak. Even if gold tanks from here, the historical precedence for higher long term rates still would be in place. And, given the recent Bank for International Settlement’s picture for gold derivatives, it appears gold is likely in a blow off top. At least short term.

    Btw, I love that article about Japanese consumer demand for cars. I’m sick and tired of being tired of listening to all of the pablum about Japan’s economy being back. That’s bunk. The Nikkei’s run has been nearly 100% correlated to gold. The Nikkei’s rise is signalling an end to deflation in Japan. Bet someone else’ life on it. 1% economic growth and a PE of 20? Are you kidding me? It’s global inflation driving Japan’s markets. And, if history repeats itself, the US long bond is likely signalling a slow down. And once that picture becomes clear, long term rates will start to rise and we will see the emperor has no clothes when inflation is found out to still be a major problem again with a slowing economy. Thus, leaving Ben with a mini crisis. One created by bubbles, debt, trade imbalances and all of the other pretty pictures the CNBC pumpers don’t talk about. Raise rates in a cratering economy or do what we did in the 70s which would bode ill for equity valuations. Ben is going to get one hell of an indoctrination is my guess.

    But, hey, do what CNBC and the Street wants you to do. Put all of your money in equities. I saw some idiot over at Prudential was 100% weighted in equities. My God, are you freaking serious? Can I get a job where I can be an incompetent and rake is shitloads of money?

    I see nothing to convince me this run is about OVER. I’m long term bullish but if this mess comes to pass, I’m heading for the hills. God save the Queen. Or more aptly, God save Ben Bernanke.

  5. vfoster commented on Jan 9

    the significance is that the rally in stocks out of the 2003 bottom was simply a reflection of the devaluation of the dollar or the “reflation trade”. every asset on the planet priced in dollars rallied. it’s not a coincidence. if the Fed could simply print money and devalue the dollar to get asset prices to rise and will get away with it, meaning that there won’t be any consequences, then we don’t operate in a free market.. and maybe we don’t
    look at the market today, the press is all over dow 11k, but if you price it in gold, the market is down today.. it’s all inflation

  6. Lord commented on Jan 9

    “an ounce of gold today is the same as it was 5000 years ago and the same as it will be in 5000 years time;”

    Clearly false as it buys much more today than then. People often confuse a gold standard with a constant price standard, but as additions to the gold supply are intermittent and fleeting, gold has experienced long term appreciation, interspersed with infrequent periods of depreciation, the most notable being the importation of gold from the new world in the 16th century. In the long term, the supply is almost fixed so gold appreciates at the growth rate of the economy.

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