Does Gold Think Stocks are Cheap or Expensive?

A Secret of Great Investors is "Valuation Ratios".

In 2013 on a simple price chart, the stock market looked expensive. The benchmark S&P 500 Index was hitting new all-time highs.

However when measured against gold, in 2013, stocks looked cheap.

You could also use the ratio of the Dow Jones Industrial Average to gold. Historically you want to buy stocks when the ratio is less than 10 and buy gold when the ratio is high.

Ratio charts show the relationship between two assets.

Ratio charts are best used by looking at extremes, for potential reversals, and trends, which we don't want to bet against.

Below is an updated S&P 500-to-gold ratio chart. You can see that over the past 35 years, the ratio's average is 1.77. And right now, it's at 2.07. It's 17% above its long-term average. It's nowhere near an extreme and the trend is up.

Stocks are not cheap like in 2013 but they are not expensive either.

The Dow to gold chart 35-year average is 15. It was cheap at 8 at the start of 2013 and it's 26% above that average at 18.9 today.

What do these valuation charts tell us?

First, looking at the ratios through a valuation lens, gold is a better buy than stocks. But neither one is a great buy.

Second, markets often move from one extreme to the other the trends currently favor stocks.

Keep holding more wealth in stocks than gold. However, gold is great disaster insurance.

Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.