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Gold Relative to S&P500 (1928-2010)

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May 29, 2010 – Comments (5)

I have talked about the Dow/Gold ratio as a measure of risk aversion. And have pointed out that the Dow/Gold has much lower to go before this current cycle is over.

Update on the Dow/Gold Ratio and a few more Gold Ratios - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=387921
The Dow / Gold Ratio - http://marketthoughtsandanalysis.blogspot.com/2010/01/dow-gold-ratio.html

From The Dow / Gold Ratio:

We are not at the bottom of the current Dow/Gold Cycle. In fact, we are nowhere near the bottom (in my opinion). I have made the case many times (Is the Market Fairly Valued? Did the Market Achieve Any Meaningful Bottom Back in March?, The Long View, Sentiment: P/E, BPSPX, VIX and CPC) that we did not reach any meaningful bottom in terms of price or valuation in March 2009.

So if the Dow / Gold Ratio has further to fall, there are a few scenarios on how it could play out:

a) Both Gold and the Dow could rise from here. Gold would take of frenetically and the Dow would rise more slowly so that the DGR would fall.

b) Both Gold and the Dow could fall from here. The Dow would fall faster than Gold.

c) Gold will rise and the Dow would fall.

All scenarios are very possible and no one knows which one will happen. But I have made my case for c) many times, and that is the one that I think has the highest likelihood of occurring.


This next chart is a picture of Gold/S&P500, or Gold's upside potential measured against equities for the next cycle. Again, I am still sticking with Gold up and equities down as the call. But in either case, I think gold will vastly outperform equities as a general asset class for the next several years

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Gold Relative to S&P500 (1928-2010)
By Barry Ritholtz - May 28th, 2010, 11:30AM

http://www.ritholtz.com/blog/2010/05/gold-relative-to-sp500-1928-2010/

WJB’s John Roque looks at the past 4 cycles in Gold relative to the valuation of the S&P500:



ENLARGE

5 Comments – Post Your Own

#1) On May 29, 2010 at 3:23 PM, gman444 (28.94) wrote:

Excellent chart, Binve.  Thank you.

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#2) On May 29, 2010 at 3:55 PM, binve (< 20) wrote:

gman444,

No problem gman, thanks!..

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#3) On May 29, 2010 at 5:55 PM, ChrisGraley (29.68) wrote:

Those that do not understand history are doomed to repeat it. ;)

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#4) On May 29, 2010 at 6:04 PM, amassafortune (29.55) wrote:

Ahh, 1982. Bought the starter home with a 12% mortgage. It was a relief to refinance at 9% a few years later. Thank you, Mr. Volcker. You were probably the best decision Carter ever made.

I have not been on the gold bandwagon because I believed inflation would be kept in check a la the 1930's - huge debt being the common mitigating factor. Over the past year, though, the looming worldwide fiat currency issues are making me a convert. Eric Sprott and David Franklin helped that process with their exposure of just how ineffective stimulus has been and how the same success rate is likely with the $1 trillion European bailout.

Sprott and Franklin, fans of gold, estimate in their article posted by Zero Hedge, that U.S. stimulus has been 91% ineffective. The calculation is detailed in the article, but their bottom line is that only a $200 billion effect on GDP has come from the $2.5 trillion increase in debt to fund stimulus and bail-out actions.

" Buying dimes with dollars is bad business, government-funded or not."' they conclude.

They also have an excellent discussion of the cost of job creation. "The White House justifies this exorbitant amount by stating that at the current employment level, each job in the US economy generates $105,000 in GDP, thus resulting in good "bang for the (taxpayer) buck".5 Spending $92,000 to generate $105,000 in GDP seems justifiable on the surface. But further digging reveals that the actual cost to save or create one job in the US was $117,933 per job from February to December 2009"

They wrap up with examples of European bank leverage and why, as in the U.S., much of the $1 trillion bailout will benefit the banks more than any country or citizenry. 

I am not a total gold convert yet due to the deflationary force of debt, but this worldwide Ponzi currency experiment leaves the average person with only gold as a possible refuge.

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#5) On May 29, 2010 at 7:15 PM, binve (< 20) wrote:

ChrisGraley ,

Exactly :)

amassafortune ,

Very nice thoughts man!! You know that I am a huge fan of Eric Sprott: SqueezePlay: Sit-Down with Eric Sprott - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=396617

>>I am not a total gold convert yet due to the deflationary force of debt, but this worldwide Ponzi currency experiment leaves the average person with only gold as a possible refuge.

Fair enough. But you know that I too am not an "inflationista". I think there will be massive debt deflation behind the backdrop of extreme monetary inflation, resulting in stagflation, much worse than we experienced in the 1970s, like I make the case for here More on Debt Saturation Equals Diminishing Growth, Employment, and Capacity Utilization… - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=394221 and other places. I think this will be extremely bullish for gold. And even those that are firmly in the deflationist camp (such as David Rosenberg) are very bullish on gold..

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