2024.04.01 13:40
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Hitting a new high again! Is gold more expensive or cheaper than stocks?

Analysis shows that currently the gold price is undervalued by 52% compared to the S&P 500, and undervalued by 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 Fed's favorite inflation gauge slows down and rate cut expectations rise again, gold has once again hit a new high.

On Monday, spot gold broke through the $2250 mark, reaching a high of $2265.43 per ounce, setting a new historical record.

Since March, the upward trend of gold has shown no signs of stopping. But has the price of gold gone too far?

While we cannot determine the true value of gold, we can perhaps determine whether it is cheap or expensive relative to the stock market. Charles Gave, co-founder of investment firm Gavekal, pointed out in a report:

In financial markets, the balance between safe-haven assets and risk assets is an eternal consideration.

Data shows that the current price of gold is undervalued by 52% relative to the S&P 500 index, and undervalued by 13% relative to its own long-term trend.

In stark contrast, the S&P 500 is 33% above its own long-term trend level.

Why compare the two, Charles Gave explained:

The capitalist system requires at least two value reserves to ensure the normal operation of the economy. If there is only one reserve asset, its value will be infinitely large, as in the case of local currency going to zero.

Gold can be seen as an investment in past savings surplus and can be transformed into energy through exchange with oil, allowing holders to participate in the economy. Gold is anti-fragile because its value relative to oil is relatively fixed, at around 17 barrels per ounce;

In contrast, the S&P 500 represents the most efficient use of energy, but if energy prices suddenly rise or fall, its value may change suddenly, making it very fragile.

In the long run, the S&P 500 index, gold prices, and oil prices should cyclically converge. Since 1972, the three have converged three times, with the most recent being in 2015. Since then, they have once again shown a typical divergence. It is likely that in the not too distant future, they will converge again.

It is worth noting that, according to Charles Gave, since 1952, the ratio of the S&P 500 index to gold has remained relatively stable. Gold has experienced 3 mean reversions in times of fear, and the stock market has experienced 3 mean reversions in times of greed. Gave points out, The market is currently in a state similar to the early 1970s, with a severe lack of energy supply and a shortage of gold supply. However, energy "consumption" assets (stocks) are significantly overvalued. It was not a good idea back then, and I'm not sure if it's a good idea now.

Looking ahead, Gave predicts:

In the foreseeable future, the global preference will continue to favor "energy consumption" represented by the S&P 500, rather than energy producers or past accumulated energy reserves (i.e., gold);

Very few people expect a structural increase in oil prices or anticipate sustained inflation due to an energy production deficit. Those holding these expectations have already bought gold.

Gave strongly recommends using gold as an important tool for hedging stock positions. He believes that at least 20% of the portfolio should be allocated to gold positions, as anything below this proportion will not yield substantial returns