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Gold, Stocks, Oil... Choose One

Tyler Durden's picture




 

Via ConvergEx's Nick Colas,

Would you rather have one “Share” of the S&P 500 at $2,124, or 41 barrels of crude oil, or 1.86 ounces of gold?  Yes, they are all worth the same amount at the moment, but the price relationship between the three has shifted over the decades. 

 

 

For example, the current ratio of 41.4 barrels of crude to one S&P 500 is 45% higher than the 30 year average of 28.5x. That means oil really should be at $75/barrel with the S&P 500 where it is. The short term (10 year) average is even lower – 17.7x – pointing to a “Fair Value” for oil at $120. Perhaps equity markets do have more room to run if this historic relationship is on hold for the moment, as slack global growth and shifting geopolitics keeps oil prices down and (hopefully) helps U.S. consumer confidence. 

 

As for the stock/gold relationship, the current ratio of 1.86 ounces to 1 S&P share is pretty spot-on the 30 year average of 1.89.  So why is gold breaking down even as stocks are melting up?  Stocks are a proxy for confidence in everything from the financial system to human ingenuity’s ability to create a better world; gold’s +5,000 year record of value is essentially a reminder that nothing ever changes.

Warren Buffett hates gold as an investment, a fact that has perplexed me for years. Berkshire Hathaway’s own Borsheims jewelry store will sell you all the gold you want, provided you pay the premium over its intrinsic value to have it shaped into necklaces, bracelets, or rings.  Somehow, silver is ok – Berkshire once owned 129 million ounces of the stuff back in the 1990s. Charlie Munger, Buffett’s partner of many years, famously told CNBC in 2012 “I think gold is a great thing to sew in to your garments if you’re a Jewish family in Vienna in 1939 but I don’t think civilized people buy gold”.  Yep, that’s what he said…

The problem Buffett and Munger seem to have with gold is that it just sits there and looks pretty.  Their model for investing is to buy businesses in whole or in part and essentially keep capital cycling through the global economic ecosystem.  That’s essentially their version of a social contract – if you have more money than you need then you hand it back for others to use, hopefully for productive purposes.  Fair enough – their balance sheets are much better than mine so it’s hard with their success using this paradigm.

The other side of the coin is that every single piece of gold ever minted by any government or made by private hands - anywhere and at any time - still has value.  The modern financial system – banks, capital markets, the whole thing – have value in excess of gold when they do what they are supposed to do: channel human innovation and enable social progress.  And when they fail in those goals, gold is the default investment until the next time around.  Just consider that over the last 10 years – one very full cycle of economic expansion, severe contraction and then recovery – the performance of gold still far outstrips the S&P 500: 161% to 75%. Oh, and gold also beats the performance of Berkshire Hathaway (up 154% over the last 10 years), with a lot less volatility for most of that period.

Yet on a day when gold broke to a five year low while U.S. equity markets seem destined to make new all-time highs in short order, we need some more historical context on the relative value of each asset class to make a thoughtful case for what’s happening now.  To do that, we have done a time series analysis back to 1970, dividing the value of the S&P 500 by the price of a troy ounce of gold. There are some handy graphs highlighting this calculus right after this note, but here are our key takeaways:

  • Gold and stocks are fairly valued relative to each other right where they are.  Over the last 30 years, the average ratio has been 1.89x, or that many troy ounces of gold for one S&P 500 “Share”.  The current ratio is 1.86 (2124 divided by $1,144). The math back to 1970, before the U.S. shed the last vestiges of a gold standard, is 1.53x meaning that prices up to $1,388/oz are also “Fair value”.
  • Gold goes through long waves of social favor/rejection, and it is better to view gold’s relationship to equity prices through that pendulum-mounted lens.  Consider that the all-time low ratio was 0.17, back in the early 1980s, when investors clearly felt that the U.S. central banking system was broken and the domestic economy was stuck in a cycle of “Stagflation”.  Yes, it took over 5 S&P 500’s to buy one ounce of gold. The relationship went through “Par” in the late 1980s – gold and S&P 500 at the same price – and hit a high of 5.5x during the dot com bubble of the late 1990s.  It would be hard to find a time in modern economic history when there was more enthusiasm for the wonders of man’s creativity than Internet 1.0. Gold was something for a Gucci bangle or Rolex Submariner case, but that was it.
  • You probably know the rest – gold and stocks revisited “Par” in January 2009 and stocks didn’t get the upper hand again until April 2013. Now the ratio is the aforementioned 1.86.  From 1996 to 2007, the ratio never dipped below 2.0x, so that’s a proxy for where the relationship tends to go during periods of capital markets enthusiasm.  And we clearly seem to be in such a phase.
  •  In the end, most investors own gold not strictly as an investment, but as a hedge.  The math we’ve highlighted shows why.  When humans get things wrong – central bankers, politicians, even overly enthusiastic equity investors – gold is a useful asset, uncorrelated to the rest.

We can also do this analysis for oil, which in many ways is a more “Useful” commodity than gold and looks very undervalued versus U.S. stocks.  Again – graphs at the end of this note and summary below:

  • The current ratio of oil prices to the S&P 500 is 41.4 (2124 divided by spot WTI at $51.31) and the 30 year average (using a blend of Brent, Dubai and WTI) is 28.5x. That makes the current price of oil deeply undervalued to the S&P 500. Crude really should trade at $75 if the historical average relationship held any sway.  That is essentially 50% higher than current levels.
  •  Maybe the U.S. is less energy intensive now, so is the relationship is different?  Nope – just the opposite actually.  The 10 year average is 17.7x, so oil should be $120/barrel.
  •  The best thing you can say – and this is pretty good, actually – is that global geopolitics and oil supply fundamentals are conspiring to keep crude prices lower for longer than usual this late in an economic cycle. The math backs that up, and this should help U.S. stocks move higher from hopes that consumers will (one day) spend their savings at the pump.

 The upshot of these two case studies is pretty clear: oil is cheap relative to stocks and the savvy investor should look at the beaten up energy sector for value plays.  Oil doesn’t stay cheap forever – never has, any way.  Gold is likely in for some more rough treatment, only because the pendulum of human confidence is still moving towards “Hope” and away from “Fear”.  And that’s OK – history if full of such cycles.  And gold has seen them all.   

 

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Sat, 07/18/2015 - 13:50 | 6327263 Publicus
Publicus's picture

Out of the three oil has the most utility.

Sat, 07/18/2015 - 14:01 | 6327296 SickDollar
SickDollar's picture

Give me that relic metal called gold

 

 

Sat, 07/18/2015 - 14:03 | 6327308 Bad Attitude
Bad Attitude's picture

I'll take the gold. I can put it in a pocket and take it with me. At my destination, I can exchange the gold for oil, ammunition, or some other useful commodity.

Forward (over the cliff)!

Sat, 07/18/2015 - 14:11 | 6327327 DeadFred
DeadFred's picture

At MIT the saying is Work, Friends, Sleep: choose two.

So Why can't I choose two here?

Sat, 07/18/2015 - 14:22 | 6327343 Pinto Currency
Pinto Currency's picture

 

 

For the last 8 months, gold withdrawals from Shanghai Gold Exchange vaults have averaged 50 tonnes per week vs global gold mine production of 55 tonnes per week.

How long can the paper price keep collapsing vs. this clear 'collapse' (not) of physical gold demand?

https://www.bullionstar.com/blogs/koos-jansen/strong-withdrawals-mainland-hong-kong-gold-vaults/

 

NY and London are headed for a crisis as the real physical gold disappears from these pretend gold exchanges.  All the current paper price charts and correlation studies are irrelevant.

It all comes down to the real physical gold at the end.  NY/London gold contract holders will look silly.

http://www.marketwatch.com/story/china-wants-to-steal-gold-market-reins-from-new-york-london-2015-07-09

Sat, 07/18/2015 - 14:41 | 6327392 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

Rock, paper, scissors. Could be a long wait since they can make more paper anytime they want, right now it's 90:1 but it could be 190:1. I think we could easily go to $6-800 before there's any joy, these fuckers will stop at nothing, why would they? What do you do if you're robbing a bank and nobody stops you at the door with your wheelbarrow full of cash? Go back in for a second trip. Repeat.

Sat, 07/18/2015 - 14:52 | 6327416 Captain Debtcrash
Captain Debtcrash's picture

I would like the 140 ounces of silver a share of the S&P could buy, but that’s not to say that gold isn’t an important part of a Precious metals portfolio, but if you talked to most financial advisors they would tell you not to own any precious metals.  Considering the valuations of other asset classes, and the economic landscape precious metals look like a bargain. 

Sat, 07/18/2015 - 15:08 | 6327450 Pinto Currency
Pinto Currency's picture

 

 

Silver could be the linchpin.

So little metal stock above ground and massive open positions.

Not only a monetary haven metal but also an essential industrial material.

The metals market looks set to do a sweeping turn around the London and NY paper mills and then we will all be in for a metals surprise (no matter how prepared we though we were).

Sat, 07/18/2015 - 16:05 | 6327593 realmoney2015
realmoney2015's picture

Trick question in the article. I'd rather have 142.8 ounces of silver. Right now the gold/silver ration is 76.6. Historically it about 18. Silver is the best buy around. I would recommend starting with pre 1965 halfs, quarters, and dimes as they re most recognizable espially for newbies. That is why I use these coins for my candles (www.etsy.com/shop/ScentSavers).

Pre 1965s are also good because they in small units (divisible). Once your stack starts growing, you probably want to think about 'diversifying' into generic rounds, eagles, and bars.

Sat, 07/18/2015 - 15:09 | 6327454 LooseLee
LooseLee's picture

Quite right. Most financial advisors are brain dead from their so-called 'education', which is nothing more than 'status quo' conditioning where I come from...

Sat, 07/18/2015 - 16:10 | 6327605 realmoney2015
realmoney2015's picture

I agree. Silver is the better option currently. Gold has its place as well (smaller swings than siver). Financil advisors are not there to make YOU money. They are there to make their BOSSES money.

Sat, 07/18/2015 - 16:35 | 6327675 Fukushima Fricassee
Fukushima Fricassee's picture

Platinum is the best although silver is fabulously undervalued as well.

Sat, 07/18/2015 - 15:12 | 6327461 fazsha2
fazsha2's picture

I am willing to wait.  The global debt levels are at extreme levels, as are interest rates.  The S & P PE ratio is 20.79. Yes, it was higher at 29.04 at 1/1/2000, but at much lower debt levels. The cheapest the S & P ever reached was 7.39 on 1/1/80, when gold was the most expensive. In 1929 it was 17.76.

 

So, high profits + high leverage + high PE + low interest rates usually means something cannot last.  I imagine that rates will stay the same, but that profits will wilt, then profits will shrink, then leverage will contract, on the way to stock prices dropping.

Sat, 07/18/2015 - 16:01 | 6327583 daveO
daveO's picture

Yea, how convenient that the author ignored debt levels. All those thingies float up and down on the debt tide created by the FED and DC. Gold is money, dollars are debt instruments. 

In 1971 gold was $35(debt instruments)/oz.

US national debt was $390 Billion. 

Now, gold is $1132/oz. An expansion by 32 times.

US outstanding debt has increased to $18,150 Trillion. An expansion by 46.54 times. 46.54 X 35=$1629 before accounting for what's actually housed in the federal vaults, if anything. 

Gold's currently on sale versus FED funny money.

Sat, 07/18/2015 - 16:36 | 6327681 Socratic Dog
Socratic Dog's picture

And that's the debt they admit to.  Add in unfunded liabilities and multiply it by, say, 10 or so.

Sat, 07/18/2015 - 22:59 | 6328562 A Nanny Moose
A Nanny Moose's picture

Lead allows one to steal all the gold and oil one could ever use.

Sat, 07/18/2015 - 14:01 | 6327297 Deathrips
Deathrips's picture

Oils going to 20$ on paper

SP going  sub 900 and is a digital promise backstopped by the fed

Gold is second only in manipulation to silver pricing mechanisms.

 

Ill take silver in hand...

 

RIPS

 

Sat, 07/18/2015 - 15:05 | 6327448 max2205
max2205's picture

Just load me up on NFLX Alex......what did I win?

Sat, 07/18/2015 - 20:23 | 6328181 Tall Tom
Tall Tom's picture

A box of stupid crackers?

Sat, 07/18/2015 - 17:57 | 6327880 PermaBug
PermaBug's picture

So gold and stocks are expensive and oil is cheap, hard to argue with that.

 

And yet, oil is the commodity that gets 'used up' and many say is about to run out. It's also absolutely vital to the operation of the entire world's economy, and wars are fought over it constantly.

 

Yes, the obvious answer is, buy gold. LMFAO.

Sat, 07/18/2015 - 22:15 | 6328445 sun tzu
sun tzu's picture

Many have been saying oil has been about to run since 1920 and today we are pumping out more oil than ever before. LMFAO!!!

 

Plenty of things are vital the to world's economy, among them land, food, coal, natural gas, uranium, and water. 

Sat, 07/18/2015 - 13:51 | 6327265 Oh regional Indian
Oh regional Indian's picture

I'll take that neglected silver 2-kilo bar sitting in the corner....

Sat, 07/18/2015 - 13:52 | 6327269 saints51
saints51's picture

Oil has no value if humans can not afford machinery that uses it or a home that it can heat along with other petro products.

Sat, 07/18/2015 - 13:58 | 6327287 smegma_2
smegma_2's picture

You must be high (or stupid) if you think the sole purpose of petroleum is combustion.

Sat, 07/18/2015 - 14:03 | 6327307 saints51
saints51's picture

Read again slow guy.

Sat, 07/18/2015 - 14:06 | 6327311 smegma_2
smegma_2's picture

I did...yup...you're still an idiot.

Sat, 07/18/2015 - 14:11 | 6327326 saints51
saints51's picture

I respect your right for freedom of speech. Good day sir.

Sat, 07/18/2015 - 14:21 | 6327351 Diet Coke and F...
Diet Coke and Floozies's picture

Fight club, and this is a reply... The end really is near! :O

Sat, 07/18/2015 - 14:32 | 6327363 saints51
saints51's picture

Go ask Freddie,Trav777,Slewie,EKM,TIS,VAST-Dom and several others about this stupid fucking so called fight club.

This site has been infiltrated all the way to the top including the member I responded too. Zerohedge, is to some of us who understand, our Sunday comics section in the newspaper.

I stick around for the posters who know whats up like skateboarder,Oh Regional Indian, Yen-Cross, No Debt, PODS, Kaiser Sosa,Tmosely(when he does post),Cog,Miffed,Mscreant,Rainman and several others.

Sat, 07/18/2015 - 16:48 | 6327708 RockyRacoon
RockyRacoon's picture

In regards to your original comment above, silver has less value in a depressed economy as well.  Oil would be a useless goop for rusted out machinery, and silver would be a pretty metal for decoration only if there were not the myriad of electrical, medical, and plating uses it has in a thriving economy.  I read elsewhere that the "investment premium" for the current silver price is about 18%.  So, removing that premium reduces the silver value considerably.  Gold on the other hand has little value other than what it has historically held -- and that alone makes it the king of wealth preservation.  Take-away:  Gold/silver ratio might be skewed for a reason!

Sat, 07/18/2015 - 17:02 | 6327744 agent default
agent default's picture

If you want to do anything with crude and serve any purpose, you better have access to some damn expensive machinery.  Like a distillation plant.  And no, you cannot make a small scale thing in your garage, unless you like big explosions, fucked up poisonings and really questionable highly toxic and useless stuff coming out the other end.  

Sat, 07/18/2015 - 13:57 | 6327282 Vincent Vega
Vincent Vega's picture

I'll take gold for 1.86, Alex.

Sat, 07/18/2015 - 13:58 | 6327285 bozoklown
bozoklown's picture

It's only prudent to own some physical gold. you don't need to be a conspiracy nut...just someone who realizes that shit happens.

Sat, 07/18/2015 - 14:02 | 6327301 Vincent Vega
Vincent Vega's picture

I'm perfectly happy being a conspiracy nut.

Sat, 07/18/2015 - 15:04 | 6327447 Consuelo
Consuelo's picture

+++

 

Especially when so many of those so-called 'conspiracies' seem to keep popping up as 'fact'...    Strange how that works, isn't it...?

Rock on --

Sat, 07/18/2015 - 14:02 | 6327303 Skateboarder
Skateboarder's picture

Do gold-colored iPoops count? jajajaja (Spanish laughter)

Sat, 07/18/2015 - 14:01 | 6327298 homiegot
homiegot's picture

All of them dummy.

Sat, 07/18/2015 - 14:07 | 6327315 Soul Glow
Soul Glow's picture

1.86 oz of gold.  Obviously.

Sat, 07/18/2015 - 16:50 | 6327715 Soul Glow
Soul Glow's picture

Junks?  K I'll talk to myself then.  Storage costs on the gold is lower than oil and stocks.  Easier storage - I can keep it under my pillow.  And I trust myself with it more than trying to maintain the oil.  I also don't trust bankers, so that is another reason.

Sat, 07/18/2015 - 14:08 | 6327319 Consuelo
Consuelo's picture

How relevant is 'data back to 1970' within the context of a central-bank-influenced economic paradigm that didnt' exist until the late 1980's or early 90's, not to mention the total other-wordly paradigm that has only existed in the current era since 2008...?

 

 

Sat, 07/18/2015 - 16:09 | 6327596 daveO
daveO's picture

Debasement is as old as coins. Those ratios would still work to gauge investment flows within the 'bubble', i'd think.

https://en.wikipedia.org/wiki/Denarius

Sat, 07/18/2015 - 14:20 | 6327348 Greater Fool Theory
Greater Fool Theory's picture

I hold some physical gold and silver (or at least I did just prior to losing all of it in a tragic boating accident) so this comment is not anti-pm.

I've thought a lot about this over the past five years.  I've watched stocks climb when I was convinced they wouldn't.  I've watched pms languish when I was convinced they wouldn't.  I've preserved my assets I suppose, but purchasing power has eroded.

I regret my choices.  And yet, I sure don't think this is going to continue.  In fact, I'm convinced that stocks will fall and pms will rise.  I am even more convinced of this today than I was last year.  So as far as passive investing goes, I will continue to favor a very conservative approach to stocks.  Even if it means I continue to miss out.  Frustrating, but I just don't see any alternatives that will allow me to sleep at night.

The good news is that I am actively investing in my own business interests which I manage.  I have a lot more control over the outcomes than on the wall street casino.  If it wasn't for this, I'd be a lot more frustrated.  

I sure ain't bragging about my investments though... Damn!  Anyone else feel kinda foolish?  

Sat, 07/18/2015 - 16:24 | 6327642 daveO
daveO's picture

No. If I'd bought 'all in' in 2011, I might. Metal price vs. national debt levels are what count, in the long run. I don't think the scam can run that many more years. US national debt has doubled in about 8 years. That's parabolic on the long term charts. Central banks don't allow very much deflation, just enough to scare out metal savings.

Sat, 07/18/2015 - 22:38 | 6328510 sun tzu
sun tzu's picture

The question is will you be able to enjoy or use it in your lifetime? nobody knows how lng they can keep the ponzi scheme going or if they will outlaw precious metals when the SHTF

Sat, 07/18/2015 - 16:58 | 6327730 EINSILVERGUY
EINSILVERGUY's picture

Yes and No.

Wrong now but only because we are early. I have a balanced approach but stopped participating in the every increasing rigged markets. I see PM's as insurance not an investment so the price slam doesn't bother me. Just confirms the end time is getting closer but taking its damn time.  I feel like Im in a turnip cellar knowing the tornado is close but wishing it would get  here and get it over with so I can get topside, survey the damage and start rebuilding

 

Sun, 07/19/2015 - 11:27 | 6329390 northern vigor
northern vigor's picture

Why do people mock people who buy gold for insurance .........but wouldn't bat an eye at a guy that buys insurance every year with nothing to show for it after a lifetime because he never had an accident or fire? The guy that bought gold may never see the SHTF but at the end his estate still has a hoard of gold no matter what it is worth, it is more than the returned cheques from the insurance company.

 

Sat, 07/18/2015 - 19:12 | 6328020 Gods
Gods's picture

I feel you I did my first purchase of silver @33/ounce. Now I am still buying the new lows 15/once may be it goes lower I will still buy. A few years has gone and my stack is looking pretty dam good now. I sat on the sidelines as stock went up. However in my defence I lost over 500k when the housing market took a dump it took me years to save that money up and to see it go was awful. Anyways keep stacking and never barrow.

Sun, 07/19/2015 - 09:11 | 6329188 lucyvp
lucyvp's picture

Yup same here,

Some other thoughts ...  There is only an approximately 70% correlation between xle and wti.  And those futures based etf's have built in losses due to contango.  

It is really hard to own oil, even though I agree with the author that oil is the asset to own now.  I've asked my husband several times now and he refuses to build a petrolium reserve in the back yard :)

The author does not mention that gold and oil are correlated at about 60% so holding gold is sort of like holding oil. And if it really is, there will be a lot more pain to gold, if oil stays depressed.  Maybe down into the low 1000's, high 900's.

I'm only at 8% stocks, and non-financial value stocks too, so I have left a lot of money on the table.  I'm dollar cost averaging into xle now.

Sat, 07/18/2015 - 16:37 | 6327353 franciscopendergrass
franciscopendergrass's picture

S&P gets to cheat.  The companies in the S&P change through time.  Gold is always going to be gold.  Oil is always going to be oil.  This is like Gold and Oil competing against an equities all-star team. 

I wonder what that chart would look like if they only used the companies in the 1970's

Companies are creatures tied to governments and politics.  Oil and gold can cross borders and survive wars.  I can't say that for companies.

Sat, 07/18/2015 - 14:24 | 6327360 ArtOfLife
ArtOfLife's picture

I take the stocks because I need income. Oil and gold don't produce dividends.

Sat, 07/18/2015 - 17:23 | 6327801 adr
adr's picture

Neither does Netlix, Amazon, Price line, Chipotle, and hundreds of other stocks that have soared to ridiculous valuations. Dividends are dying because they aren't needed to entice people to biy stocks anymore.

If Netflix goes tits up, oil and gold still have value.

Sat, 07/18/2015 - 18:32 | 6327953 ArtOfLife
ArtOfLife's picture

I only buy stocks that have been paying dividends and increasing them for >25 years consecutively. I wouldn't touch those stocks you mentioned with a ten foot pole. 

Sat, 07/18/2015 - 14:28 | 6327366 Dan The Man
Dan The Man's picture

"..as an investment."

Thats the rub.  Gold is the ultimate protection of wealth, and MAYBE you get lucky and trade it at the right time for a tidy profit, or some tidy beachfront.

Saying gold is a terrible investment tho, is like saying Ferrari sucks cuz they make lousy dune buggies.  

Well, thats just not what it was meant for, and beyond prejudicial.  

Judge Gold by what it does, protect wealth.  By that metric, its done a marvelous job for thousands of years.

 

 

Sat, 07/18/2015 - 14:35 | 6327378 Bluntly Put
Bluntly Put's picture

As for the stock/gold relationship, the current ratio of 1.86 ounces to 1 S&P share is pretty spot-on the 30 year average of 1.89

So, I guess the gradually declining interest rate structure enginereed by the fed and system banks has nothing to do with this relationship? I'd say any of your assumptions and charts are entirely dependent on this artificial system enabled by continually declining interest rates.

 

Sat, 07/18/2015 - 15:01 | 6327438 all-priced-in
all-priced-in's picture

I would expect both the S&P and gold to be worth fewer dollars if interest rates on the 10 year treasury go to 5% - and both would lose even more if it goes to 10%.

 

 

 

 

Sat, 07/18/2015 - 16:40 | 6327680 daveO
daveO's picture

Au Contraire! Yes, interest rate increases will kill stocks. The more debt a company has, the worse off it will be. The price of gold, on the other hand, is still indicative of the outstanding national debt. If interest rates go to 10% and federal spending remains the same, that adds 10% to the national debt in interest payments! This is exactly the sort of thing that happened in the late 70s. Gold and interest rates went up together. Gold went parabolic. At $800/oz. gold discounted hyperinflation and a debt level of nearly $9 Trillion, a level the US didn't attain until 2007. Guess where gold was in 2007.

http://upload.wikimedia.org/wikipedia/commons/3/3b/USDebt.png

Sat, 07/18/2015 - 22:48 | 6328531 all-priced-in
all-priced-in's picture

Gold will go up at some point - but if interest rates go to 10% the price of gold is going down - way down before it goes back up.

 

The first few interest rate increases cause gold to lose value  - it is not until people lose confidence in the US to make the interest payments and roll over the principal that gold regains its loss.

 

There are 10 people looking for interest income for every guy wanting gold. 

 

 

 

 

 

 

Sat, 07/18/2015 - 15:42 | 6327530 HughK
HughK's picture

Yes, I agree, Bluntly.  

We need historical data b/c it's better than no data, but the analysis is only valid if the conditions of the last 45 years graphed above continue.  But, we have had declining interest rates since the mid 80's and ridiculous interest rates for the past five years.  

These graphs don't do a good job describing the dynamic of a major bond market rout, although maybe it's worth looking at the 1970's portion for some amount of guidance as to what things might look like if the low growth gets even lower, or negative, and the inflation gets worse, giving us stagflation as bad or worse than the staflation of the 70's. 

Sat, 07/18/2015 - 14:39 | 6327385 FreeShitter
FreeShitter's picture

Ill take the cocaine and hookers. Gold> oil > stocks in the near future.

Sat, 07/18/2015 - 14:49 | 6327408 JustPrintMoreDuh
JustPrintMoreDuh's picture

WTF?  No US-Tbills?

Sat, 07/18/2015 - 14:49 | 6327409 teutonicate
teutonicate's picture

My opinion of this article is that it is biased against precious metals because it fails to give sufficient weight to the fact that throughout much of the historic timeframe that it covers, fundamental confidence in banking was high, correlation between markets was lower, and globalization had not created the same black swan risks that we face now.

Comparing the gold price of the S&P in this historic context to the present, fails to account for massive and fundamental problems with the dollar, central banking and world-wide fiscal incompetence.

I stay with Gold, at least until we have a significant S&P correction that prices the S&P in a way that compensates the investor better for the risk he is taking.

Frankly, I think the worst possible investment right now, which you don't mention, is US$ denominated bonds, because the investor's entire return is subject to massive devaluation of the dollar, which I believe is likely.

Sat, 07/18/2015 - 14:51 | 6327415 FreeNewEnergy
FreeNewEnergy's picture

Oil, gold and the S&P are all overpriced in terms of silver, so...

I'll take 143 ounces of silver for the win, Alex.

10 10 oz. bars and the rest in ASEs.

Sat, 07/18/2015 - 14:58 | 6327433 teutonicate
teutonicate's picture

Good point.  Had silver been an option, I would have chosen it over gold.

Sat, 07/18/2015 - 17:36 | 6327825 Latitude25
Latitude25's picture

You are somewhat correct however premiums on silver are a bit excessive.  Take a look at this analysis.

https://www.youtube.com/watch?v=b4nRE_8XhcM

Sat, 07/18/2015 - 15:02 | 6327441 Gothic Optimism
Gothic Optimism's picture

Pfft! Mere mortals, this ancient Vampire has seen all this before, I am eternal, Gold and Silver for the long term. 

Sat, 07/18/2015 - 15:28 | 6327473 dazednconfused
dazednconfused's picture

Needless to mention that Q ratio of the S&P 500 is the highest ever since 2000 dotcom buble.

Sat, 07/18/2015 - 16:21 | 6327629 RichardParker
RichardParker's picture

The problem Buffett and Munger seem to have with gold...

The problem I have with Buffett and Munger is that they suck off of the government's tit at the expense of the taxpayer (read the plebes).

Sat, 07/18/2015 - 16:55 | 6327725 U4 eee aaa
U4 eee aaa's picture

I trade all three at the moment (substituting the Qs for the SPX). They play off each other well

Sat, 07/18/2015 - 16:59 | 6327732 Panic Mode
Panic Mode's picture

If I have the facility, I will choose oil than gold without a heartbeat.

Sat, 07/18/2015 - 17:19 | 6327789 adr
adr's picture

I didn't read anywhere in that article that maybe, just maybe, the S&P 500 is overvalued.

Instead of saying oil should be $120 a barrel if it's historical multiple is applied to the current price of the stock market, maybe we should say the S&P should be halved to meet the current value of oil.

Even at 1200 a pretty good argument can be made that the S&P would still be overvalued.

Sat, 07/18/2015 - 17:30 | 6327813 Latitude25
Latitude25's picture

Massive intervention and manipulation of all markets including the gold market makes this analysis IRRELEVANT.  The huge amount of unpayable debt is bringing the system to collapse and the central planners' answer is to lie about it all so an appearance of normalcy persists until one day you wake up and they've reset it all to your complete surprise.  Hedge accordingly.

Sat, 07/18/2015 - 18:37 | 6327962 Kkarpilov
Kkarpilov's picture

The buble is comming, cant wait to Short S&P!  What would be the buble name this time?   

Sun, 07/19/2015 - 11:18 | 6329369 northern vigor
northern vigor's picture

The Fed Bubble

Sat, 07/18/2015 - 18:46 | 6327984 withglee
withglee's picture

The modern financial system – banks, capital markets, the whole thing – have value in excess of gold when they do what they are supposed to do: channel human innovation and enable social progress.

Is that what they're supposed to do?  What's the 4% inflation leak for?

Sat, 07/18/2015 - 18:57 | 6328000 EscondidoSurfer
EscondidoSurfer's picture

Interesting, but oil is a throw away comparison. There is no scarcity.  It is becoming less scarce all the time.

Sat, 07/18/2015 - 19:47 | 6328095 litemine
litemine's picture

Oil is Finite ( Oil takes a long time to "Become"), Gold is Finite (which is why is became the CURRENCY for many years)

Stocks, Fiat Money can be printed, now the paper trade in all commodities are many multiples of physical metals and the Banks or traders backed by the American Tax Payer has Raped mainstreet. With the Facists control over the American military thay keep many countries in line with a stick. Overthrowing other Governments, giving bad loans to the corrupted leaders they put in place...............then main assests that could have supported the Country get back on it's feet are lost.

This is a World that has started to created Control and Fiancial Slavery.......World Wide.

If you don't see this, and you are Religious, than the Hell created for Billions of Humans may end up Haunting you foe Eternity. Those in Control, worship (or not) Money, with no remore. You, are a Mental Minion for their Cause.

May God have mercy on your Soul.

Sat, 07/18/2015 - 19:45 | 6328088 Prober
Prober's picture

I will take the gold because it has been such an outstanding performer in this time of increasing monetary, fiscal, economic, and political crisis globally.

/SARC MAXIMUS

Sun, 07/19/2015 - 00:19 | 6328173 Jungle Jim
Jungle Jim's picture

I don't care about anything's performance over decades. Or years. I care about months. Or weeks. Or days. Some of us are going under NOW. We can't wait three to five to seven to fifteen to thirty years, or longer.

Sat, 07/18/2015 - 20:24 | 6328183 ghostzapper
ghostzapper's picture

Oil "is cheap" given historical ratios and the energy sector is "beaten up" so get long energy stawks - ok skipper! Nah, I'm projecting crude to go sub-$30 in this current cycle so I'll pass.

Historically ratios and patterns are interesting but not nearly as important as the circumstances we have right here and right now. My TA says crude below $30 and it nevah shoulda been above $75 it was all financial engineering and wizardry to pimp the Wall Street shale scam.

Sat, 07/18/2015 - 20:27 | 6328186 CPL
CPL's picture

It's not money that makes a society run or keeps it fed, it's oil.  Everything is a derivative of oil and energy.  Even stocks and gold.

Sun, 07/19/2015 - 07:41 | 6329081 eishund
eishund's picture

The last i checked, gold looks like shiny yellow and oil is a slimey black. 

Sat, 07/18/2015 - 22:28 | 6328480 northern vigor
northern vigor's picture

A year ago I bought some gold at $1490 oz canadian, the Canadian dollar was in the 90 cent range. Today the dollar is in the 77 cent range and the gold is worth $1422 Canadian.

If I left my dollars in Canadian dollars it would be worth  14% less...the $1490 would have lost $200 purchasing power in international markets ...but I protected my wealth with gold. 

I know this doesn't work out for everyone in the last 15 months, but it could for other currencies in the future. Gold values are relative to where you live and what currencies you use. This how gold works. It is nice to make a profit...but it is more important to protect wealth.

Sat, 07/18/2015 - 23:43 | 6328641 CPL
CPL's picture

What did 20 dollars buy at the grocery store when you bought it and what does it buy now?  It's the only functional metric of 'money'.

Sun, 07/19/2015 - 11:16 | 6329181 northern vigor
northern vigor's picture

Groceries have gone up in the store in Canada in the last year. I never went through and did a study...but I'll hazard a guess,  14%....so the gold has protected my savings against currency decline, and inflation just as it has through history. 

I worry about retirement. Even if the shit doesn't hit the fan...a person who retires on savings with no pension as myself, needs to protect wealth for 30 years. I have a mix of assets as everyone should. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sun, 07/19/2015 - 03:28 | 6328865 squid
squid's picture

Ok.....

Folks bought the family home in Edmonton in 1964 for C$18,000....no garage or landscaping. At the time that was worth ~475 onces of gold.

 

Neighbour sold out 1 month ago for ~C$350,000. Mom's property is slightly larger so say she gets C$400,000. Problem is, if she sold 475 oz of gold today she'd get ~C$550,000.....and I have not factored in:

50 years of peoperty taxes,

50 years of fire insurance,

Cost to build the garage,

Cost to land scape,

Cost to maintain.

 

Bottom line, the house was a SHIT investment. Dad should have bought gold, buried it and rented. He'd have been WAY further ahead.

 

Squid

 

 

Sun, 07/19/2015 - 05:02 | 6328927 falga
falga's picture

Hydro cracking technology has essentially doubled worldwide supplies of crude so the ratio of crude at 41 is probably right and maybe still a little low .... Maybe should be 60!!!!

Sun, 07/19/2015 - 09:39 | 6329220 jmcadg
jmcadg's picture

I'm sure I must have missed it, but isn't it the fact that the S&P is massively fuckin' overvalued not oil under valued.
TIMBER bitchez.

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