Nick here, with a brief story about gold before we dig into some data points on the same topic. My parents were Cuban refugees who came to the US in 1960, flat broke because they had to leave everything behind. Once my dad found steady work again, he started buying gold coins on business trips outside the US. He never really liked stocks and wanted portable wealth in case he needed to move his family again.
Fast forward to the early 1980s and all the gold he had purchased in the 1960s/1970s was now worth 3-4x his cost basis, and that small horde paid for a large part of my college education. An undergrad degree cost $25,000 back then, or 42 troy ounces. Today my school (Haverford College) costs $300,000, which is 175 ounces of gold. Things change…
One might think that Americans’ interest in stock market investing might be much higher than stacking gold as my dad did, but the truth is somewhat different. Here is a 5-year Google Trends chart showing search volumes for “gold coin”, “gold etf”, “buy gold” and “buy stocks”.
What we see:
- Under more normal conditions (2015 – 2019), “gold coin”, “buy gold” and “buy stock” search volumes run pretty even. “Gold etf” searches are not as popular.
- The pre-2020 blip you see in “buy stocks” (yellow line) was in late 2017/early 2018 during a strong period for US equity returns.
- And then you get to that huge spike in “buy stock” searches, which started in February of this year and peaked March 15-21. This is 10x more searches than normal.
What it means: yes, there were a lot of retail investors plowing into stocks in March and April, but gold… not so much. That’s pretty remarkable considering the tremendous uncertainty prevalent at the time.
Does that mean US stocks are overvalued versus gold just now? One simple analysis to answer that question is to divide the S&P 500 by the price of an ounce of gold. At its core this math pits the market’s perceived value of human ingenuity (stock prices) against the world’s oldest store of value (gold). Here is that ratio back to 1970, data courtesy of the World Bank.
What we see:
- The only time stocks got significantly out of whack with gold was during the dot com bubble and its unwinding (+3x ratio from 1997 to 2002).
- Any ratio below 1x makes the S&P 500 a compelling buy, as from 2009 – 2012.
- The current ratio of 1.74x is not far off the long run average of 1.57x.
What it means: based on this measure US stocks and gold are fairly valued against each other and we’re a long, long way from stocks being dramatically overvalued relative to the yellow metal.
Finally, let’s look at silver relative to gold, because unlike the previous chart we’re deep into uncharted waters here. This is the ratio of gold to silver prices back to 1970:
What we see:
- At 98x currently, the gold-silver ratio is almost double its long run average of 53x back to 1970. The only analog is early 1991 when Gulf War I was getting underway and gold was well bid but silver, primarily an industrial metal, was not.
- Silver did have a bounce off its mid-March lows when the ratio was 126x.
- History buffs will note that the gold-silver ratio was roughly 15x for several millennia, even up to the Latin Monetary Union in Europe during the late 19th century. The difference now is that central banks still buy gold, but not silver, largely because it is more efficient to warehouse. That has helped preserve gold’s reputation as a store of value.
What it means: silver is not trading as a precious metal because its demand profile is largely industrial rather than a monetary substitute like gold.
Summing up: our advice on gold as an investment remains unchanged, namely that we always recommend a 3-5% portfolio position. Days like today explain why, with gold +0.8% and the S&P down 5.9%. I (Nick) also hold physical gold, but more out of family tradition than anything else. Maybe in another decade or two I will use it to go back to school…