Chart: The S&P 500 Stock Index Priced In Terms Of Gold

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I don’t know what if anything this chart tells me, but for some reason I was compelled to post it here for posterity. Below is the S&P 500 index priced in terms of ounces of gold, from 1971-2010. Via BusinessInsider.

It has become popular to refer to gold as “real money” these days (and thus mock paper currencies like the dollar and euro). I don’t know about that. As a non-correlated asset to own as a certain percentage of your portfolio (and rebalance regularly), then maybe. But as a way of pricing things, gold values are way too volatile, and while the price of gold does relate to the falling dollar, it also relates strongly with speculation and fear.

I also feel that the newly found ease of buying gold in a brokerage account via an ETF like GLD has helped the price skyrocket. Click, click, and now you own gold. If you haven’t heard, gold ATM machines are coming here as well. Hmm.

In any case, if you do think of gold as money, then according to this chart the S&P 500 is at a reasonable historical price.

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  1. Jon, does ur chart mean that gold prices are same as it were in 93?

  2. It means the ratio of S&P 500 index (no dividends) to the price of gold is the same as it was in 1993.

  3. If you look at a chart of the prices of gold adjusted for inflation, gold hit around $2200 an ounce in 1980.

  4. I flipped to Mad Money last night, and Cramer was emphatically stating that gold was currency not commodity and would go higher. I wonder if that’s a signal the bubble’s about to pop?

  5. Thanks for the chart. A bubble in gold or not, the value of the US dollar should be a concern to us all. Bill Gross from Pimco recently said the dollar could lose 20%.

    1% on your savings account isn’t too good if the true value has lost 20%.

  6. Is gold really in a bubble? Gold was worth more (relative to the S&P 500) from ’72 to ’90. You could argue that was a buddle that burst in ’90 and gold prices plummted 600% thru ’02. However, those a long-in-duration buddles. I’m not sure “bubble” is the right term to use.


    Great chart that proposes sliver is the true metal of value

  8. It can still double from here. Though I think silver is a better bet ’cause it is industrial use.

  9. I think people need to differentiate between the dollar losing its value (relative to commodities and other currencies), and relative to itself (i.e. inflation). To me the former is a rather secondary worry. If the dollar depreciates 20% my savings account balance will still be the same. Other than gasoline, most of what I buy on a daily basis is priced/produced in dollars (or currencies such as the renminbi pegged to the dollar) and shouldn’t cost much more. Inflation, the increase price of in domestic goods and services, to me is much more of a concern than a depreciation in the dollar relative to other currencies. If everything around me starts costing more the real value of my savings will deteriorate, which is worrisome.

  10. You are doing a great disservice to your readers by misrepresenting gold. Gold is a store of value and every once in awhile it does an accounting of paper money. Additionally, if you did your due diligence, you would find that gold backed ETFs do not actually hold physical gold. They hold paper gold, in other words, they own futures contracts on gold.

    Additionally, the volatility in gold is merely volatility in paper currency. If you made a chart of 1 ounce of gold on the x-axis and plotted the dollar, you would find a consistent decline of the dollar’s value.

    There will be a bubble in gold, but we are not even remotely close to the top yet. In the 80’s gold bubble, there were lines outside of coin shops hours long to get some of that yellow stuff. I’m not sure I could even locate a coin shop now. Take a look at other asset bubbles like the tech stocks in 2000 or the housing market circa 2005. Everyone and their mother owned tech stocks in 2000, and everyone owned a house in 2005. I’d venture to say that no one paid more than 20% down on houses and used margin for the other 80% if not the full 100%. Do we see many people owning gold or purchasing gold on margin, let alone 100% margin? Until that happens, I do not see a bubble top in gold.

    Oh, and this talk of gold not having intrinsic value… arguably nothing has intrinsic value other than food and water.

  11. @andy – “Additionally, if you did your due diligence, you would find that gold backed ETFs do not actually hold physical gold. They hold paper gold, in other words, they own futures contracts on gold.”

    Really? That’s not what the prospectus of GLD says. They supposedly own a huge vault. Are they lying?

    “The Gold Shares represent fractional, undivided interests in the Trust, the sole assets of which are physical gold bullion and, from time to time, cash.”

  12. “In any case, if you do think of gold as money, then according to this chart the S&P 500 is at a reasonable historical price.”

    Since the y-axis is a ratio (S&P 500 divided by gold), an alternative viewpoint is that “gold is inflated relative to the S&P 500”.

  13. @E-Dub – That’s very funny. “See how poorly Gold has performed priced in Silver”. Too bad the chart only starts in 2009, I wonder what it looks like from 1950-present.

  14. I’ve done my homework on GLD. It isn’t for me. When push comes to shove, GLD will not have the gold it claims.

  15. “when push comes to shove” i.e. when governments fall, property rights are no longer enforced, and zombies rule over the fiery landscape that was once America. 😉

  16. @MikeH: Ha!

    So, I guess what that chart really says is that you should sell your gold and buy the S&P 500. How do I short gold?

  17. I am convinced that your best bet is being well diversified in stocks via a reputable mutual funds with a good long-term track record. I am avoiding the gold bubble.

  18. @andy: based upon the prospectus of GLD they should. They are currently one of the largest holders of gold, and in some cases more than a few central banks. Whether they actually own all of the gold they state is another issue.

    IMHO owning your own gold and silver is something that should be done anyways. Not a large % of your net worth mind you but say 5%.

  19. You really should read Rothbards The Case Against the Fed and What Has the Government Done to our Money to understand gold and silver as currency. One should also read the master money printer himself, Alan Greenspan’s essay on Gold and Economic Freedom.

    Now the US Constitution implicitly states gold and silver as payment for public debts. However, people should have choices on what is used for money. So palladium and platinum could be used as a tangible asset (I can’t afford them but coins are minted in these metals).

    One should also take a look at the documentary From Freedom to Fascism by Aaron Russo. The Federal Reserve like all central banks is a private money monopoly. Thanks to this monopoly, we have inflation every year. They can create money without limit (yet some reason I must pay federal income taxes). The FDIC is technically bankrupt (though anti-gold claim this was an issue with commodity currencies).

    Just some thoughts. Too big a topic for one post.

  20. Jonathan,
    I like how you try to figure out gold’s true value by looking at gold’s price relative to other assets. Another asset class I like to use to calibrate the price of gold is house. back in 1980, at the height of gold bubble, the price of an avg house was $40k and gold was $850/ounce.this means it takes roughly 47 ounces of gold to buy a house. Currently the avg price of a house is around 200k. This means gold is not a true bubble until it reaches $4255/ounce. This is way I also think Gold is still in the early phase of the bubble and still got a long ways to go. Also to keep in perspective is our financial situation is a lot better back in the 80’s then now.

  21. @andy – I like the skepticism. One less thing to worry about for me, since I don’t own any GLD. (I own a few ounces of actual gold.) But you should forward that link to George Soros and John Paulson. With the amount of GLD shares they own, I’m sure they’d get to check those vaults if they really wanted. 🙂

  22. One of the strange things about gold is any discussion tends to bring out wild-eyed “gold bugs” with some kind of end-of-the world mentality. Not saying all investors are that way, but they tend to show up if/when the discussion gets going.

    In fact, a bet on gold (bullion or GLD) is kind of a bet that things are going to go really bad, but not go all the way off the cliff. Yes, gold tends to rally in times of panic or doubt in currencies and regimes. But if the world really started to fall apart it would be really difficult to try to get your hands on the actual physical gold if you owned shares of the ETF. So there’s that counterparty risk.

    Then even if you could get the gold or actually stockpiled it in your basement because you didn’t trust the ETF, and the economic system truly did start to implode, what good would gold really do you? If I had food or guns, I wouldn’t exchange them for your gold. Gold seems like a kind of half measure that protects you in the case where currency regimes break down but markets of exchange do not, and to me that seems like a very narrow set of outcomes to hedge.

    I think this video sums it up perfectly:

  23. Because most things are priced in USD and not gold, then yes, prices fluctuate quite significantly in terms of gold over the short term. I believe the advantage of pricing things in terms of gold is that we can see when governments are engaged in a too-loose monetary policy, and when the market is losing confidence in paper assets (and likely with good reason). This is where gold functions as a very useful signal.

    Gold also functions as the ultimate store of value when things are not looking so bright elsewhere. Even if all paper assets burned to the ground, gold would still be there. (Of course, oil and other commodities can fulfill this role to a certain extent as well).

  24. I do not think that an end of the world scenario is coming, yet I still believe that GLD is not worth the coutnerparty risk. As with every other paper currency in the history of the world, the dollar will eventually lose all of its value (it has already lost most of its value). Look at John Law in 1720, the French Revolution in 1790, and countless other examples dating back to Cesar Augustus and prior. The world didn’t end back then and it wont end now.

    What will happen is companies like GLD will go bankrupt and not have any assets to liquidate for its shareholders in the bankruptcy proceedings.

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