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Gold versus S&P 500 – Where is the Value?

March 30th, 2013 · J.W. Jones · 30 Comments

This past week we received the final 4th Quarter GDP number which came in at 0.39%. The total 4th Quarter growth was terrible, plain and simple. Based on the performance in the equity markets that we have seen thus far in the 1st Quarter of 2013 investors would expect strong GDP growth. However, the only thing spurring stock market growth is the constant humming of Ben Bernanke’s printing press.

The real economy and the stock market are no longer strongly correlated. Essentially, they are meaningless. How do you evaluate risk when Treasury linked interest rates are artificially being held down by the Federal Reserve? How do you evaluate earnings growth estimates when most government based statistics are manipulated or “smoothed” to perfection?

My final argument to anyone who is a true believer that the stock market is representative of the economy is a very simple premise. If the stock market is the economy, how does the stock market evaluate small business earnings growth when most small businesses are not publicly traded? It is a simple question, but I have yet to find a sell side analyst that can work around it with facts.

To back up this information, here is a chart courtesy of that demonstrates the S&P 500’s price action compared to economic data and overall macro risk.


The chart above clearly depicts the divergence between the macroeconomic data and the performance of the S&P 500 Index. Yet the sell side continues to scream that stocks are cheap, earnings are going to ramp up later this year on insane S&P 500 earnings growth expectations, and the consumer is going to remain strong even though payroll taxes have increased and the “wealthy” are paying more in taxes.

Even amid those concerns, no one knows for sure what the impact that Obamacare and the various new taxes associated with it will have on the business community. Again, the only thing driving growth is directly linked to the Federal Reserve’s balance sheet expansion. The chart below is courtesy of the Federal Reserve’s website.


On August 8, 2007 the Federal Reserve’s total assets were $869 billion dollars. As can clearly be seen today, according to the Federal Reserve the central bank’s total balance sheet has grown to over $3.2 trillion dollars. The increase is on the verge of rising exponentially. With QE, QE2, QE3, Operation Twist, Extended Operation Twist, and now with QE 4 in Perpetuity this trend is certainly unlikely to shift.

At this point in time the Federal Reserve is printing roughly $85 billion dollars each month to purchase Treasury securities with a focus on the long end of the maturity curve. As primary dealers of Treasury securities process these flows the money eventually finds its way into riskier assets that offer higher rates of returns through balance sheet machinations at large money center banks.

It has proven that the flow of the Federal Reserve’s printed monies are more important than the total money stock for a variety of reasons and inflation according to the government’s data is under control ex food and energy.

However, how are people supposed to survive without food and energy in today’s world? The last time I went to fill up my gas tank or to purchase food prices have gone up significantly. According to the 1990 version of consumer price reporting, real consumer inflation is running around 6% currently and has the following comparison.


Unfortunately the 1980 based inflation numbers are even uglier, which based on Shadowstats’ data chart would place consumer inflation at nearly 10%. The calculations being used by are based on the government’s OLD ways of calculating inflation. The calculations were adjusted over time and today the data is completely manipulated by not including items that typically experience the largest levels of inflation.

Normally I talk about price action, probability based option trading, and technical information. However, before investors consider buying stocks near the all-time NOMINAL (non-inflation adjusted) highs, why not simply consider the backdrop of the total economic situation.

Central banks around the world are printing money at an alarming rate and their balance sheets are growing to levels not seen in human history. Interest rates are being manipulated to levels that are historically at record lows or near record lows based on real inflation data.

Macroeconomic indicators are issuing a cautionary tone with significant divergences showing up in many areas. Earnings expectations for the S&P 500 in the 3rd and 4th Quarter of 2013 are extreme and borderline ridiculous.

So before jumping headlong into equities based on some sell side analysts recommendation or even worse, a financial advisor who is more interested in his/her commission than they are about producing gains consider the following comparisons.

S&P 500 Index (SPX) Price Chart – 1 Year Price History


Gold Futures Spot Price Chart – 1 Year Price History


Clearly paper gold represented by gold futures is no substitute for physical ownership, but when one considers the fundamental backdrop for gold versus the S&P 500 Index, it should be clear which asset is offering the most value at current price levels. It does not require any inserted trendlines or oscillators, it should be clear which asset is expensive and which asset is cheap based on the real long-term economic fundamentals.

I will give you a hint regarding which asset is offering the most value. It can’t be printed, it has represented the store of value since the advent of modern civilization, and it is senior to all paper currencies.

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

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30 responses so far ↓

  • 1 Greg Atkinson // Apr 2, 2013 at 9:35 am

    The continued stimulus (money printing) in the U.S. would be giving both stocks and gold a lift so perhaps they are both trading a touch too high? Maybe in a few years we will look back and wonder why the Federal Reserve tried to fix one bubble by creating bubbles in others asset classes?

  • 2 Biker // Apr 2, 2013 at 9:53 am

    A touch too high? Surely not, Greg. The long term five-year view (27/10/2010,) is more optimistic:

    “My Gold Miner positions are..

    Citigold 400000 shares @8.5c
    Lihir Gold 10000 shares @$2.98
    Gold One 100000 shares @28.5c

    Over the next five years I expect Citigold to hit $1.50 Lihit to hit around $7 Gold One to go around $3…”

  • 3 Biker // Apr 3, 2013 at 8:16 pm

    Comment to Christina re his 2010 $92K committed to Citigold, Lihir, and Gold One: “My guess on the share price is right.. $970000… My guess is Half right $485000… Somewhere in between (prolly closer to reality.. $750000)…I put my money where my mouth is, and took the miners… You go ahead and buy physical gold if you wish…”

  • 4 Greg Atkinson // Apr 5, 2013 at 9:43 am

    Now this makes things interesting. According to a report today on Bloomberg gold is heading towards a bear market.

    “Gold fell to the lowest since May, nearing a bear market, on signs that investors are seeking higher returns in equities as the global economic recovery cuts demand for haven assets.

    Prices have tumbled 18.2 percent from a record close of $1,891.90 in August 2011, nearing the 20 percent that typically defines a bear market. Metal for immediate delivery has slumped 18.5 percent from its all-time high settlement of $1,900.23 in September that year. Bullion rallied every year from 2001 through 2012 as investors sought protection from currency debasement and potential inflation.

    Gold futures for June delivery fell 0.4 percent to $1,547.30 an ounce on the Comex in New York, after dropping to $1,539.40, the lowest for a most-active contract since May 30.”

    Source: Gold Nears Bear Market on Global Recovery: Commodities at Close

  • 5 Lachlan // Apr 5, 2013 at 7:49 pm

    Well there we go Greg. The gold market is becoming interesting. Gold through support now.

    What is interesting is to see the decoupling of gold with market reality…which was not as apparent a year or two back. BoJ announces a new monster asset purchase which (they don’t live in a vacuum) will affect other nations policies on easing and yet gold goes down. So though I believe firmly in gold for the long term (for the coming new financial order) for now it can go just about anywhere as long as ZIRP power prevails. And with the unpredictability of this market evident it would be unwise to rule anything our for now.

    Still for today gold is oversold and seller beware…. but there are levels of oversold and then there is RSI divergence which can theoretically take us a long way down even then.

    My own take is to purchase at these levels though I cannot do so because I am heavily invested in a grass seed harvest after drought breaking rain here…..and money is tight everywhere anyhow. Just too many opportunities at present.

  • 6 Biker // Apr 5, 2013 at 10:52 pm

    The mettle of the ‘buy-on-dips’ brigade will be tested soon, with gold hitting A$1482 earlier today.

    We used to call this ‘catching a falling knife’, but there are some very sharp operators out there.. .

  • 7 Lachlan // Apr 6, 2013 at 6:03 am

    I am not predicting gold will do anything here but if it does fall further then 1350 is a good support area. That is approximately an average of prices through the consolidation period immediately post GFC. If it goes below that then a more bearish scenario develops but there is no change to the secular bull market, technical scenario here at these levels.

    Silver made a reversal complete in approx Sept 2012 and probably brought some bulls on board before falling to a lower low. I like 25-26 for a bottom of this particular decline.

  • 8 Stillgotshoeson // Apr 6, 2013 at 6:24 am

    I bought more shares yesterday in a gold miner and a silver miner..
    The silver miner I was hoping to get a fraction cheaper but my order was not progressing up the order table so bumped offer to get some, closed at buy price.

    Gold went up $28USD/Oz last night.

    Europe is still a mess, poor jobs figures from America, bluff and posturing from N Korea.

    Canadian housing market has turned for the worse and is now not looking to good.

    Fundamentals for precious metals are still sound imo despite any short term pull backs.

    This is still no reason to go “all in” on one asset class.

  • 9 Greg Atkinson // Apr 6, 2013 at 10:46 am

    ASX listed Newcrest Mining(NCM) at its current price (just below $19) is tempting. I not suggesting anyone buy it, but it is worth having a look at just in case gold does make another run up.

  • 10 Biker // Apr 6, 2013 at 3:32 pm

    “This is still no reason to go “all in” on one asset class.”

    Completely agree. It would be every bit as foolish to base one’s investment strategies on one economic scenario; for example doom’n’gloom… .

  • 11 Stillgotshoeson // Apr 6, 2013 at 3:58 pm

    If one was just waiting for the “doom and gloom” event to happen they would be sitting on cash and ready to pounce when it happens rather than be investing still, even in a volatile market.

    My investment portfolio is superannuation, share portfolio, cash and bullion. Property is the only thing missing from my asset base and at some point will be in the portfolio as well.

    I add to my bullion/share base as money allows, keeping a buffer for emergencies. I have an income protection policy that covers me for $2000 a week for 2 years if something happens to me.

  • 12 Biker // Apr 6, 2013 at 4:30 pm

    “…ready to pounce when it happens…”

    Surely you mean ‘if’… . 😉

    What would be an indication that ‘when’ is the preferred scenario?

    Predictions of property value decline, bank failure, sharemarket crash (say to 4200), investment in PMs and PM miners, higher unemployment, a ‘savaged’ Aussie dollar, China’s demise, perhaps?

    Does income protection cover sharemarket losses?

  • 13 Stillgotshoeson // Apr 6, 2013 at 5:21 pm

    No, of course it has to be a “when” not an if if we are expressing the “doom and gloomer” perspective, otherwise they would not be a “doom and gloomer” if they were using “if” would they…

    Still lacking comprehension skills I see…

  • 14 Biker // Apr 6, 2013 at 5:33 pm

    No, after analysing your calls for the last three years (and your results) I think I comprehend fairly well. 🙂

  • 15 Lachlan // Apr 7, 2013 at 5:36 am

    It might be “Gold vs Bitcoin” soon fella’s….just before it goes back to gold vs shares again.

  • 16 Biker // Apr 7, 2013 at 8:57 am

    TGW Season 3 Episode 13 was quite entertaining, Lachlan… and, we thought, aptly titled:

  • 17 Lachlan // Apr 7, 2013 at 6:46 pm

    Yeah, I don’t like their chances BP.

  • 18 Biker // Apr 8, 2013 at 11:53 am

    Definitely prefer assets to be tangible, as opposed to virtual, Lachlan!~ 😀

  • 19 Greg Atkinson // Apr 13, 2013 at 10:05 am

    Interesting times for gold prices. Is this the popping of what George Soros called the ultimate asset bubble?

    From CNBC:

    “Gold plunged into bear market territory Friday, as a fierce selling wave swept across commodities markets and shorts raised their stakes.

    Gold tumbled four percent and fell below $1,500 per troy ounce for the first time since July, 2011. It officially entered bear market territory Friday, down more than 20 percent from its August, 2011 high of $1,891.90.”

    Source: No More Shine? Gold Plunges Into Bear Market Territory

  • 20 Lachlan // Apr 13, 2013 at 11:36 am

    I have just perused some charts here Greg and the action is interesting.
    Dow and ASX200 extended to upside.
    Gold very oversold… no relief rallies for a long time and if it keeps dropping hard the next couple weeks it might hit say US1425 imo before a bounce/rally.
    PM miners utterly decimated.
    AUDUSD breaking higher and could even run back to 1.10 next few weeks..could do. Pennant is broken to upside.

    So it all makes me wonder if a sharp market event (shares correction) is about to occur in the not too distant.
    DXY could potentially sprint to 88/90 here even.
    Something to keep an eye on anyhow.

  • 21 Lachlan // Apr 13, 2013 at 11:49 am

    Actually if we go back to 08/09 we can see that gold had a roughly 30% correction as broad market prices were in collapse mode. So far we have had a gold correction of say .. (1900-1480)/1900 x 100..approx 22%…just in rough calculation. So gold bulls should not be surprised at this action. A thirty percent drop from 1900 would be 1330. One of my favourite support areas was 1350 which I mentioned about a year ago. Bulls should be open to that possibility although I think it would take quite some time to get there from here. Especially with the presses running hotter every day…but then we know they have to keep a paper lid on things to allow themselves that luxury.
    Who knows…must keep an open mind and hope for the best if your long.

    This is not investment advice. Just some random thoughts and chatter for today’s market. Furthermore if you cannot take a risk without blaming somebody else when things go wrong then please grow up and get a life!

  • 22 Stillgotshoeson // Apr 13, 2013 at 2:03 pm

    I will go the manipulation theory. The big names are saying gold is finished, get out of gold and the gold price has fallen… If the big names are saying to everyone to sell and get out of gold, who is the buyer?… The big names I would hazard a guess.

    That being said, it appears it is only the ETF/Futures that are being sold off. Physical is still being pretty much held.

    Which I feel supports my view, there is not enough gold out there to support a strong rise in paper gold and many investment companies would be hit to the negative if the paper gold is allowed to rise and then called in on.

    I am in for the long game. I buy as I can afford with money I do not need straight away. I have a job and an income stream to support my lifestyle.

    THe portfolio has taken a hit the last 12 months for sure, even the dividend plays that have performed ok have not been enough to cover the PM hammering. THe fundamentals are still sound for why I purchased them, so I will continue to add to the portfolio as funds allow.

  • 23 Lachlan // Apr 13, 2013 at 2:45 pm

    Hi Shoes. If the markets are approaching another moment like in 08/09 I hope my cash status aligns with the buying opportunity. My income from sales is erratic and sometimes I am cashed up other times wondering what’s happening but that is par for the course in my game. I can rest assured somewhat that my inventory is growing and just hope I cash in a nice blob when the markets are ready for buying.
    As for PM manipulation I think par for course and as with many markets also but there is a real demand in the market for monetary metal which hopefully will account for better PM exchange rates one day.
    It might be too that the current setback in PM’s looks severe because Au prices are already higher than historically seen and the nominal differences between highs and lows is much higher compared with the volatility measured in percentages.

  • 24 Biker // Apr 13, 2013 at 7:02 pm

    One of the major benefits of ageing is watching as history repeats itself. And one of the dangers of making really extreme forecasts is that some b@st@rd may quote you verbatim, even in the long run… .

  • 25 Greg Atkinson // Apr 13, 2013 at 10:03 pm

    The printing presses working overtime sure makes it hard to get a grip on the markets. In general we know QE will help stocks but the worry is how quickly will investors exit stocks when they get a whiff that QE will be coming to an end or slowing down?

    As for gold..well I don’t expect the big guns are being totally upfront with us about how they are playing the gold market. But what still worries me is how much of the stuff is sitting in vaults and how far it could fall if a wave of selling comes into play.

    Having said that, if it were to get down below US$1200/ounce even a gold bear like me might be tempted to be a player…maybe. Or I might just opt for a gold mining stock like Newcrest. (although I don’t like the look of the 2 year chart)

  • 26 Lachlan // Apr 14, 2013 at 5:31 am

    Greg I guess the downside of QE from a central authorities point of view is that every man and his dog wants to front run your moves which would decrease your control. I guess there are ways to minimise some of that.

    BP I don’t expect any new lows in any market and my thoughts may include the following…
    Gold and even the PM shares could go even lower yet….
    Markets could go even higher…
    AUD too…
    ie the divergence to continue a bit more even.
    This might be setting the stage for an event because in good times gold trades somewhat in sync with risk whereas this divergence over time points to something blowing up…. which gives much maligned Ben a chance to crank the machine harder.
    I’m sure he could have found a better job eh 😉

  • 27 Lachlan // Apr 14, 2013 at 5:36 am

    In this scenario and from a distance there is just going to be volatility inside the same range trade post 08/09…but some terrible market events will unfold in any case. Well you can’t have a major correction without somebody or something blowing up. The perpetual QE machine keeps the bottom side floor in place.

  • 28 Biker // Apr 14, 2013 at 8:47 am

    We’ve spoken a few times of the necessity to preserve flexibility and choice, particularly through the acquisition phase.

    I meet more and more blokes my age whose motto “I’ll ride this out”” has meant they’re now living in penury, on OAPs.* Quite a few of them had exceptional prospects for a very comfortable early retirement.

    “…some terrible market events will unfold in any case. …”

    I think we’ve already seen the lives of countless retirees affected, not just through Super failures and share portfolio losses, but through falling interest rates. Not saying there won’t be further damage, but I’m thankful we retained the ability and flexibility (of mind and finance) to keep switching horses when necessary. It appears many rode a dying beast right into the ground.

    * They don’t disclose these tragedies. Their wives, still working, have no qualms.

  • 29 Lachlan // Apr 14, 2013 at 10:03 am

    A material floor that helps those OAGers is technology. I could say that the world has squandered much of the upside of technology and maybe that is true. But the world being stuck with what it is, there has been much improvement in living standards from technology in the last 100 years or more and I think that’s something to be thankful for. I also think that technology could be a part solution to some of the debt problems but I cannot see around that corner and many people seem to think it’s impossible for some reason.

  • 30 Biker // Apr 14, 2013 at 10:24 am

    “…there has been much improvement in living standards from technology in the last 100 years or more and I think that’s something to be thankful for…”

    Completely agree, Lachlan. Life is easier and there are more options and choices than ever.

    There’s some comfort, too, in the fact that those Aussies hit by the GFC have taken it on the chin… and just got on with the job, in altered circumstances.

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