A frequent criticism of gold is that it is hard to value beyond the price traders and investors see on a screen. Said differently, unlike stocks, gold does not have P/E, price-to-book or debt/equity ratios.
Even Warren Buffett has said gold “just sits there, and you hope somebody pays you more for it.” Still, some attempt to value gold using valuation metrics usually reserve for equities and with gold’s 12-year bull market coming to dramatic end this year, it is not surprising that gold looks inexpensive compared to stocks. [Bad Technical News for Gold ETFs]
“The gold price’s underperformance relative to the S&P 500 index which is up nearly 30% in value since the start of the year cannot be more startling,” reports Frick Els for Mining.com.
Amid talk of Federal Reserve tapering, gold prices have plunged this year, bringing a resounding ended to the aforementioned and unprecedented 12-year bull market. Collapsing bullion prices have also triggered tens of billions in outflows from exchange traded funds back by physical gold. Not surprising when the S&P 500 is up nearly 27%, but the SPDR Gold Shares (NYSEArca: GLD) is down more than that. [Gold ETFs Under Pressure]
As the chart below from Mining.com shows, gold’s average price ratio against the S&P 500 dating back to 1964 is 1.13, but today that number is just 0.71, indicating that “to return to its historically fair price, gold will have to climb by $400 an ounce. Either that or stocks could be in for beating,” writes Els.