The first chart shows the updated real price of gold since 1968, with the wild ride that comes with gold obvious. This month the real (after inflation) price of gold has risen by about 0.8% to $1,104.50 per ounce at the time of writing. The trend line however suggests a price today of $643.42 and the historical average real gold price from 1968 sits at $605.92. So by both of these measures gold appears overpriced.
The correlation between the real S&P 500 (also displayed on the first chart) and real gold is -0.32 down slightly from -0.33 last month. Eye balling the chart shows why this negative correlation is falling with gold and the S&P 500 currently almost perfectly positively correlated rather than its usual negative correlation. The second chart provides the ratio of the S&P 500 to gold demonstrating just how far apart the two can vary. Today this ratio has risen slightly from 0.99 last month to 1.06 today. The trend line however suggests a ratio today of 2.50 and the historical average ratio from 1968 to today is 1.63. So this measure would suggest that if you were looking to choose to buy the S&P 500 or gold then the S&P 500 might be the better option.
The final point to make however is that while both the first and second charts suggest gold is overpriced on historic measures I cannot forget that in 1980 gold reached an average real monthly price of $1,738 which is a long way above where we are today.
As always DYOR.
Assumptions include:
- Last Gold price actual taken on the 30 March 2010.
- Last S&P 500 price actual taken on the 30 March 2010.
- All other prices are month averages.
- Inflation data from the Bureau of Labor Statistics. March ‘10 inflation is extrapolated.
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