There aren’t many investments today where you can find deep value.
 
But here’s one. Not only does it offer strong value, but it also tells us what assets to favor—and which to minimize—over the next few years.

Gold’s current ratio to the broad stock market has a clear message to investors: it is highly likely that sooner or later, gold will strengthen and stocks will weaken.

Here’s what the data and history show…

Gold STILL Cheap Relative to Stocks

Gold rose 19% in 2019, and 24% in 2020. Yet those consecutive annual gains did little to improve its ratio to the broad stock market.

Relative to the S&P 500, gold remains deeply undervalued. The ratio is back to where it was in 2006.
 
You can see the peaks this ratio has hit before. To reach some of those prior highs it would have to rise…
• Nearly 3 times to match the 2011 high
• Over 4 times to reach the 1987 peak
• Almost 6 times to match the 1974 high
• And over 17 times to reclaim the 1980 peak!

Since it’s a ratio one asset could move more than the other, but the more likely scenario is that gold rises and stocks fall. And probably dramatically.
 
Why would this ratio reverse?

Are you prepared to profit from – what could end up being – the BIGGEST gold rally of our lives?
 

By almost any measure the stock market is overvalued, and history shows that gold tends to rise in bear markets for stocks.
 
But the big reason is because there’s been virtually no fallout from the gross financial negligence on the part of central bankers and politicians. When that process gets underway and picks up steam, investors are likely to flee stocks and pursue gold as the fear and turmoil spread.

What might a reversal in this ratio look like?

Let’s take a look at where gold and the S&P could be headed if we returned to some of the ratios above…

Thrills for Gold, Chills for Stocks

The following tables show what would happen to the prices of gold and the S&P 500 if three ratios above were to hit from current levels. To keep it simple, the tables are calculated from 4,200 for the S&P and $1,750 for gold.
 
First, if the ratio returned to its 2011 high of 1.67, here are the various prices gold and the S&P 500 could see.

In most scenarios where gold logs a gain, the S&P 500 would experience significant losses. Only at a five-figure gold price would the S&P see a gain at this ratio.
 
Even if gold fell to $1,000 the S&P would lose almost over 85% of its value.

While this scenario is pretty sobering, it only gets worse for stock investors…

Here’s what gold and S&P prices would look like if the ratio matched its December 1974 high of 2.93.
 

At no gold price in the table do stocks see a gain.
 
The difference between the two asset classes couldn’t be more stark. Clearly gold will win and stocks will lose in the ratio scenario.

And consider this: how many investors would sell at least some of their stocks and shift to gold? Throw in the fact that history demonstrates the average investor crowds in near the end and a return to this ratio is not farfetched.

And here’s the biggie, a rematch of the early 1980 ratio of 7.58.
 

This would be an ugly outcome for any diehard stock investor. Even if gold soars to $10,000, stock investors would see their portfolio lose over two-thirds of its value.
 
Remember, these are not pretend prices, model projections, or wishful thinking on my part. All these ratios have occurred before.

And given where the ratio currently sits, the odds of it moving significantly higher are indeed very high.

• When the gold/S&P 500 ratio reverses, stock losses will mount and gold’s gains will grow. Based on history the moves will probably be substantial for both sets of investors.

For investors that have no exposure to gold, you have to consider what would happen to your stock portfolio when (not if) this ratio begins to reverse.
 
I hope you’re not one of those that end up selling your losing stock positions near the bottom and buying gold near its top. Do that and you’ll end up a victim of the wealth transfer—and indirectly help me and my gold friends become richer.

Instead, given that stocks don’t stay in bull markets forever, and that gold is deeply undervalued relative to stocks and is highly likely to rise when they reverse, might it be wise to allocate a portion of your portfolio to gold now?

I encourage you to buy some gold now. At the current ratio, not only is your risk very low but you gain the hedge gold is historically famous for providing.

And if you don’t buy gold now? Well, a wealth transfer is likely coming, and you’ll either be a victim or victor.

Given where this ratio sits, gold investors are destined to be the victors.

By Jeff Clark, Senior Analyst, Hard Assets Alliance 

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