Wednesday, January 10, 2007

ratio of $Gold to the S&P 500

interesting angle from Ned W. Schmidt to to look at the value of gold. more charts etc when you click on the headline

netter ansatz von ned w schmidt um den wert von gold zu ermitteln. mehr charts usw bei klick auf die ├╝berschrift.

The chart will help us sort out the valuation question as it applies to Gold. Gold is the contra asset to paper debt and equities. In that chart is graphed the ratio of the price of $Gold to the S&P 500. When the ratio is falling, paper equities are performing better than $Gold. When the ratio is rising, $Gold is performing better than paper equities. When the ratio is at an extreme high, $Gold is over valued relative to paper equities. When the ratio is at extreme low, $Gold is under valued relative to paper equities. Note that $Gold continues near the lows, and is therefore undervalued relative to U.S. paper equities.

Also plotted in that chart is solid line which is the average value of the ratio for the sixty-one years shown in the graph. That average can then be used to assess the relative valuations of $Gold and U.S. paper equities

If Gold is equal to $605, then based on the average ratio of the past 61 years then the S&P 500 should be 511 for a return of negative 64 percent.
If the S&P 500 is equal to 1410 then $Gold should be at $1,670 for a positive return of 176%.
Reality will be somewhere between these values. What the relative valuation tells us is the $Gold has far more potential to rise than U.S. paper equities. U.S. paper equities have the potential to fall far more than $Gold.
disclosure: long gold, long goldbugs

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