Gold prices are expected to rise relative to equities as the relative value of gold is inexpensive. While well-respected investors like Berkshire Hathaway’s Warren Buffet see stocks as attractive relative to interest rates, there are some who believe prices cannot sustain current levels.
If investors ignore their value as an investment relative to fixed income securities, stocks values are becoming elevated, according to Michael Young, President at Treasure Coast Bullion Group. Young focuses on the Shiller P/E ratio, developed by Yale Economist Robert Shiller, which is continuing to rise and reaching levels that have historically foreshadowed a correction.
The Shiller P/E ratio can be calculated on any stock or index according to Young. The calculation aggregates the annual earnings of the S&P 500 companies over the past 10 years. The earnings that are calculated are then adjusted for inflation using the Labor Department Consumer Price Index (CPI). The past earnings are then adjusted to reflect a value in today's dollars. The Shiller P/E equals the ratio of the price of the S&P 500 index the adjusted value.
Young says, “The Shiller P/E ratio is elevated, and has surpassed levels seen on black Tuesday and Black Monday during the ‘29 and ‘87 crashes respectively. The ratio is slowly making its way toward the highs generated in 2000, during the dot.com craze.”
Young adds, “The S&P 500 index might be inexpensive relative to interest rates; it’s not cheap relative to alternative assets such as gold coins.” The 50-year monthly chart shows that prices of the S&P 500 index are not as high as they were during the dot-com craze, but are well off the lows. In fact, the S&P 500 index is more than 50% higher than the 10-year average of the ratio of the S&P 500 index relative to gold prices. Young says, “While there are few signs that the U.S. economy would return to the levels seen during the great recession from 2008 to 2012, a move back to the long-term 10-year average between the S&P 500 index and gold prices seems reasonable.”
With gold prices inexpensive relative to U.S. equities Young says that, “one way to protect yourself from an adverse move in the U.S. stock market, with values reaching elevated levels is to purchase gold bars or silver coins to diversify your portfolio.”
Good Investing,
Treasure Coast Bullion Group
Read more by Treasure Coast Bullion Group, Inc - Staff Writer
