Thursday, 21 June 2012

The S&P 500 / Gold Ratio (as of 31.05.2012)

In this day and age where fiat money is showing its true colour (i.e. no intrinsic value) as central banks are printing money like never before, gold as an investment and inflation hedge has in recent years received increased attention from investors, policy makers and economists alike. The banking industry is pushing to include gold as a Tier 1 capital asset and the potential reintroduction of the gold standard is also being discussed frequently these days it appears. We thought it was about time therefore to start publishing the relationship between the S&P 500 composite index and the price of Gold, the S&P 500 / Gold ratio, on a regular basis.
The ratio is calculated simply by dividing the S&P 500 composite index by the price of gold in USD/oz. It is not clear what the relationship between the two series ought to be, but it is perhaps reasonable to expect the two series to track each other over the long term. Certainly, as was the case in especially 1999-2000, the ratio can signal extreme over- or under-valuations (when the S&P 500 composite was overvalued based on fundamentals - refer to the earnings yield post in this blog published 14.06.2012). As of 31.05.2012, the ratio is 0.86. This compares to an average of 1.63 and a median of 1.14 since 1978. The charts below are updated as of 31.05.2012.

Source: Shiller Home page, World Gold Council, EcPoFi

Source: Shiller Home page, World Gold Council, EcPoFi

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