The analysis points out that the current price of gold is 52% undervalued compared to the S&P 500 and 13% compared to its long-term trend. In stark contrast, the S&P 500 is 33% higher than its own long-term trend level.
As the Federal Reserve's favorite inflation indicator slowed, expectations of interest rate cuts heated up again, and gold both reached new highs.
On Monday, spot gold rose above the 2,250 US dollar mark, hitting a high of 2265.43 US dollars/ounce, once again reaching a record high.
The rise in gold has been unstoppable since March. Has the price of gold risen too much now?
We can't find out the real value of gold, but we may be able to determine whether it's cheap or expensive compared to the stock market. Charles Gave, co-founder of investment agency Gavekal, stated in a report:
In the financial market, the trade-off between safe haven assets and risk assets is an eternal consideration.
According to the data, the current price of gold is 52% undervalued compared to the S&P 500 index and 13% compared to its own long-term trend.
In stark contrast to this, the S&P 500 is 33% higher than its own long-term trend level.
Comparing the two, Charles Gave points out:
The capitalist system requires at least two types of value reserves to guarantee the normal operation of the economy. If there was only one reserve asset, its value would be infinitely large, as would be the case when the local currency went back to zero.
Gold can be viewed as an investment in excess of past savings, and can be converted into energy by exchanging oil to enable holders to participate in the economy. Gold is resistant to fragility because its value relative to oil is relatively fixed, about 17 barrels per ounce;
By contrast, the S&P 500 represents the most efficient use of energy, but if energy prices rise or fall suddenly, its value may change abruptly, making it very vulnerable.
In the long run, the S&P 500 index, gold price, and oil price should be cyclically consistent. Since 1972, the three have converged three times, most recently in 2015. Since then, they have once again shown a typical pattern of differentiation. It is likely that in the near future they will converge again.
It is worth mentioning that Charles Gave pointed out that since 1952, the ratio of the S&P 500 index to gold has generally remained the same. Gold returned to the average 3 times during fear, and the stock market experienced a return to average 3 times during the greed period. Gavu pointed out,
The market is in a state in the early 1970s. There is a serious shortage of energy supply, and there is a shortage of gold supply, but energy “consumption” assets (stocks) are greatly overvalued. That wasn't a good idea back then, and now I'm not sure if it's a good idea.
Looking ahead, Gave expects:
In the foreseeable future, the world will continue to prefer “energy consumption” represented by the S&P 500 rather than energy producers or energy stocks accumulated in the past (that is, gold);
Very few people expect a structural rise in oil prices, or expect continued upward inflation due to a deficit in energy production. Those who hold these expectations have already bought gold.
Gave insists on using gold as an important tool to hedge stock positions. He believes that there should be at least 20% of the gold position in the portfolio, and no substantial return will be obtained below this ratio.
Editor/Somer