Thursday, January 1, 2009

The S&P 500/gold price ratio returned to 1 this week

Another indicator of the true value of U.S. stocks: The S&P 500/gold price ratio returned to 1 this week for the first time in 17 years. In other words, one ounce of gold hasn’t been able to buy one share of the S&P since 1991.

But again, while this ratio may be near historic averages, there still seems to be plenty of room on the downside for stocks… or upside for gold.

When the ratio of stocks to gold collapsed in 1971, it fell 93% over the next decade, to a low of only 0.17. So far, during this correction, the ratio has fallen only 82%. Leaving plenty of room for stocks to fall more… and/or gold to rise.

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