Jeff Clark, Senior Precious Metals Analyst
JAN 5, 2017
It might be tempting to think the stock market holds the better investment opportunity in 2017. After all, stocks have been on a tear since Trump won the election, and gold has fizzled. And no investor wants to miss out on the excitement.
But the question isn’t which asset class is performing best at the moment. The question in front of every serious investor is, which investment is likely to earn a greater return going forward? Where should new investment dollars be devoted? And which asset is likely to perform best for the next several years?
Perhaps most importantly, is there a way to even answer these questions?
Yes, there is.
First, let’s put 2016 into perspective…
Gold fell hard in the last quarter of 2016 and ended the year with a bad rep in the eyes of most mainstream investors. But all those negative headlines were a tad misleading… check out the full-year performance of gold and silver compared to other major asset classes.
Silver outperformed every major asset class last year except the commodity complex, and gold stocks. And isn’t it interesting that gold equities bested the Dow by 300%? Consider all the investors that don’t know this because of how the gold market is ignored by most mainstream journalists.
Gold itself had roughly the same performance as the S&P. And it nearly doubled the performance of the “surging” US dollar.
Clearly, gold and silver had a good year, and certainly better than portrayed by mainstream media.
So which is likely to be the better investment going forward? And after a good year is gold perhaps due for a weak performance in light of how well stocks are doing?
This Ratio Is Pointing in One Direction
Ratio analysis has its drawbacks, like any indicator. But it can be instructive when readings reach an extreme. Like now…
This chart shows the long-term gold/S&P 500 ratio (which you get by dividing the gold price by the S&P price). The lower the ratio, the more undervalued gold is compared to the S&P. The higher the ratio, the more overvalued gold is compared to common stocks. Look where it’s at now.
The ratio at the end of 2016 was 0.50, not far above its all-time lows of 0.25. On the other hand, the ratio is one-fifteenth the all-time high of 7.5.
This isn’t a guarantee that gold will someday soon be priced over 7 times greater than the S&P 500. The reading could even fall a little lower—but the greater potential is clearly to the upside. And if history comes close to repeating in the next crisis, an extreme reading will be in play.
The bottom line is, if Mike is even half right about what’s coming, the current gold/S&P 500 ratio says gold and silver will dramatically outperform common stocks.
Our goal as investors is to buy undervalued assets. Looking at the above chart, which asset is more undervalued and thus more likely to rise: the S&P 500 or gold?