Is Gold Cheap?
To answer the question you need to know what you are measuring against. Cheap against what? Let’s compare it to the world’s current favourite asset…stocks.
Stocks are just off their all-time highs and looking a little tired. Has the stock market topped out? That’s not for us to say. But is it a good time to switch 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 $1,210 per ounce… just about half the value of the S&P 500, which is trading around 2,430. So today (July 11, 2017), the gold-to-S&P 500 ratio stands at about 0.5 ($1,210 divided by 2,430). 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. Is it time to consider a little diversification?