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Gold/S&P 500 Ratio Reversal: Are Mainstream Investors Ready?

Jeff Clark, Senior Analyst, 
JUN 21, 2021

My article last week on the coming reversal in the silver/S&P 500 ratio was very popular.

But I heard from many of you… “What does this same ratio look like for gold?”

This week, I answer that. So we can be ready ahead of mainstream investors who will turn to gold when the broad stock market begins to weaken.

When you peruse the tables below you might wonder the same thing as me: are stock investors aware of just how big of a blow their portfolios could potentially see?

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.Gold/S&P 500 Ratio Still Near Lows

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?

By almost any measure the stock market is overvalued, and history shows that gold tends to rise in most stock market crashes.

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 investors are likely to flee stocks and pursue gold, as 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.

Gold & S&P Prices If Ratio Returned to 1.67

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.

Gold & S&P Prices if Ratio Returned to 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 far fetched.

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

Gold & S&P Prices if Ratio Returned to 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. You can even sidestep the stubbornly high premiums right now.

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

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

About Jeff Clark

An active investor with a love of writing, Jeff Clark is a globally recognized authority on precious metals. As the son of an award-winning gold panner, with family-owned mining claims in California, Arizona, and Nevada, Jeff has deep roots in the industry. Jeff regularly speaks at precious metals conferences, serves on the board at Strategic Wealth Preservation in Grand Cayman, and provides exclusive analysis and market commentary to GoldSilver customers. Follow Jeff on Twitter @TheGoldAdvisor