What Does the Stock to Gold Ratio Tell?

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The US stock market has been in the news recently. Having witnessed over a 10% correction since the all-time peak set on September 21. Meanwhile, gold has served as a source of stability, holding its value and rising by a modest 1% over the same timeframe. What lies ahead for the relationship between US stocks and gold?

A useful way in which we can gauge the relationship between these two asset classes is the S&P 500 to gold ratio. In plain English, this ratio asks: “How many ounces of gold does it take to buy one share of the entire S&P 500 stock index?”

As of the close last week, the ratio finished at 2.15 ounces of gold required to purchase the S&P 500 index.

Let us plot the ratio since 1999:

Previous Peaks and Bottoms in the Ratio

Note how the ratio had previously peaked in the year 1999 at 5.60 and bottomed 12 years later at 0.60. In other words, from 1999 to 2011, US stocks lost an astonishing 89% of their value relative to gold.

However, since the year 2011, stocks have been outpacing gold. From 0.60 to the present reading of 2.15 we can calculate that stocks have outperformed gold by over 250% during the preceding 7 years.

With the recent weakness in US stocks since September, what do we expect from the ratio going forward?

Ratio Trend Analysis

It is too soon yet to call a long-term reversal in the ratio lower in favor of gold.

Note the blue trendline which began at the 2011 low, and which extends through points in 2012 and 2016 to the present. Currently, this trend comes in at 1.90. This is the level that we would need to see broken lower in order to have a reasonable expectation that the major macroeconomic backdrop had changed to favor of higher gold and lower stocks again.

Note too how the ratio is now bounded lower by strong resistance at 2.45, shown in black. This level represents a sustained period of time dating back from 2002 – 2008. During which many investors sold their stocks in favor of gold. Now that the ratio has reached this same level again, we are seeing some of these individuals exchange their stocks for gold once again.

Gold Ratio at Resistance

In sum, the ratio is now confined, bounded by a rising trend at 1.90 and overhead resistance near 2.45. By extending these trendlines into the future, we can see that by mid-2020, one of these two technical levels must definitively break. Either lower in favor of stocks or higher in favor of gold.

Which way will the pattern break? Unfortunately, at certain junctures, it is best to let the market tell us. Rather than try to predict the outcome without sufficient data. And this is one of those times.

Fortunately, we do have a clear roadmap with defined support and resistance levels. Which will give us a solid answer in one way or the other within the next 18 months:

  • 1.90 must be broken to the lower side
  • 2.45 must be broken on the upper limit

Which of these levels breaks first will be a key data point for both precious metals and stock investors. It will define the trend between these two major world assets at least into the late 2020s. It thus behooves any precious metals or stock investor to monitor the outcome of this trend convergence closely over the months ahead.

Stocks have been weak recently, and we expect another significant decline is coming straight ahead. However, will the pending decline be enough to change the current trend of stocks outperforming gold?

The tale of the chart will tell for those who listen.



Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency.

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is a third party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.

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