This indicator has met the perfect storm of lower gold prices and the S&P500 more than doubling since its trough in 2009. In essence it gives a measure of the value of the US stock market in gold terms and shows that gold has dropped in value precipitously relative tothe stock market. We should note that the absolute level of the indicator has no meaning but rather the indicator should be looked at on a relative basis, to its history. While the recent moves have been large, looking back over a 20 year history does not suggest that the relative value of gold to the stock market has moved to either extreme.
Finally In the chart below we also plot the value of gold in dollars, euro, yen and pounds relative to the S&P500. The chart covers a 1 year historical period and sets all the gold/equity ratios to 100 on May 31 2013 so that the two charts may be compared directly. As we stress above the absolute level of the indicators have no meaning but rather we wish to compare the relative change in each gold price versus the S&P 500 to get a comparative measure of how they have each performed relative to the equity market. Starting at an indicator value of 100 on May 31 2013 we see that gold in pounds and gold in euro have suffered the largest falls in value relative to the equity market but that the overall trend has been similar for gold priced in each of the four currencies. In the chart we have also shown the US 10 year real interest rate (inverted) which more clearly shows the very recent divergence between the gold price (in all currencies) and the real interest rate.
In summary, the move in GOFO back to positive territory is perhaps indicative of the upwards pressure on the ‘convenience yield’ for gold abating and therefore suggesting reduced support for spot gold. There has been a recent pronounced diversion between the price of gold and US real interest rates but it is unclear at this stage how this divergence might be resolved. Should recent the fall in US interest rates be sustained support for the gold price would be expected to emerge at current levels. On a relative value basis the price of gold relative to the S&P 500 has fallen dramatically over the last two years, most notably versus the gold price in euro and the gold price in pounds. We note however that on a longer term view the gold/equity ratio does not appear to be at extreme levels in either direction.
Value of gold in dollars, euro, yen & pounds relative to the S&P500
Source: Bloomberg LP; Treesdale Partners calculations Past performance is not indicative of future results. This article was written Treesdale Partners, portfolio manager of the AdvisorShares Gartman Gold/Euro ETF (GEUR), AdvisorShares Gartman Gold/British Pound ETF (GGBP), AdvisorShares Gartman Gold/Yen ETF (GYEN) and AdvisorShares International Gold ETF (GLDE), share their thoughts about the gold space.