[Note: I am operating from a borrowed computer]
Stocks are cheap when seen from gold, that’s according to some experts.
From Bloomberg’s chart of the day,
The CHART OF THE DAY shows the price spread between the SPDR Gold Trust, an exchange-traded fund that tracks bullion, and the SPDR Dow Jones Industrial Average ETF, a fund which mimics the performance of the 30 stocks in the index. The premium widened by the most since the fund for the precious metal was started in November 2004.
Gold surged to an all-time high above $1,900 an ounce last week, pushing the value of bullion to $9.1 trillion based on cumulative supply, or about 2.75 times the market capitalization of companies in the Dow index, said John Wadle, head of regional banks research at the Hong Kong unit of Mirae Asset. Companies in the U.S. equities gauge have an average dividend yield of 2.7 percent and trade at 11.3 times estimated earnings as of Aug. 25, according to data compiled by Bloomberg.
“Gold is now a bubble compared with U.S. blue-chip stocks,” Wadle said in an e-mail in response to questions from Bloomberg. U.S. equities are “massively undervalued” based on future dividend yields of more than 3 percent, compared with no investment yields and storage costs associated with gold, he said in a report. Billionaire George Soros cut his holdings in the SPDR Gold Trust this year as prices rallied, while Paulson & Co., the hedge fund run by John Paulson, remained the largest holder, according to regulatory filings this month.
This represents apples to oranges comparison.
First of all, the stock market essentially operates from the premise of risk relative to rewards or returns from expected streams of future business revenues. There is no revenue stream or cash flow for gold.
Second, current policies maintained by governments have been to serially inflate bubbles. The main effect has been continued volatility in the stock markets.
Meanwhile price actions of gold have been manifesting the chronic malady from the cumulative effects of such political actions.
Third, there has hardly been a bubble in gold prices. The bubble is in paper money, government bonds and the tripartite 20th century designed political institutions functioning on the cartelized system of the welfare-warfare state, the central banks and the politically privileged banking system.
Fourth, gold prices have been more correlated with actions of the stock market, than used as a measure against it.
As I recently wrote,
Gold prices seems as in a cyclical downturn, that's because of sharply OVERBOUGHT conditions. On the other hand, global stock markets has been on a bounce largely due to OVERSOLD conditions (backed by expectations of added steroids).
The correlations of Gold and equity markets has been predominantly positive, where gold prices has risen in the backdrop of rising equity markets, except for the past quarter (sorry I am operating in an internet cafe, that's why I can't attach charts to give evidence).
That evidence can be seen in the above chart, where the flow of gold prices has essentially mirrored the actions of the S&P 500 (see blue lline) for the past 3 years. Such correlation can even be seen in the Philippine Phisix below.
It is only during the last quarter where such correlations (see red ellipse) has broken down.
True, correlations between assets perpetually changes as people’s actions respond to changes in the environment and to changes in the incentives that underpins their actions.
But the point here is it would seem unworthy to compare gold (what can be seen as money) with conventional risk assets as stocks or bonds and infer recommendations based on flimsy grounds.
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