Hoarding gold makes sense only for the hopeless
By Robert Cole
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
LONDON — Compared to U.S. equities, gold is expensive. You have to go back to the stagflation of the 1970s — or the depression of the 1930s — to find a time when the yellow metal was more valuable. Today’s worries could push it higher. But only the gloomiest can think gold will maintain its glittering trajectory.
Pictet Wealth Management, the Swiss private bank, points out that the value of the Dow Jones industrial average is currently less than eight times the dollar price of an ounce of gold. That ratio has been lower in the past: it was as little as five during the Great Depression, and during the late 1970s and early 1980s. But during the equity bull market of the 1960s the DJIA was worth 25 times the price of an ounce of gold. At the turn of the millennium, the ratio climbed to 40.
The comparison is far from flawless. For a start, examining the relationship between a stock average and the dollar price of a commodity is enough to make any self-respecting statistician blanch. Moreover, equities generate dividend income, while storing gold actually has a cost. Far from comparing apples with pears, this may be an exercise matching porcupines with parasols.
Even if the relationship withstands scrutiny, the explanation could be that shares are unusually cheap, not that gold is expensive. Western world demographics — which have seen retiring baby boomers shift from equities to bonds — have depressed share prices.
It is also possible that the world economy — especially in the West — will revisit the territory seen in the 1970s, if not the 1930s. The euro zone could yet fall apart, damning economic activity and squashing faith in fiat currencies. The United States is hardly in rude health, and a Chinese hard landing cannot be dismissed.
Still, you have to be pretty bearish to believe the Dow/gold ratio will plumb its previous lows. And even if it reaches that point, the explanation may be falling shares rather than rising bullion prices. Five times the current price of gold, in DJIA terms, would imply a 35 percent drop in the U.S. benchmark. That scenario can only appeal to the gloomiest bears.