The Gold/Stocks Ratio Provides Opportunities

The market defies recession predictions, but looming risks remain. Weakness in gold provides an opportunity to enter the market at better prices.

What Recession? Markets Party Like It’s 1929.

With all the bearish signals throughout this year and last, it would seem that the recession is nigh.

And yet, stocks continue to rally. Last Friday, the S&P 500 closed up for the fifth week. Since March, stocks have been on a parabolic rise — as seen in this chart:

A recent article in Barrons reported the beginning of a new bull market, noting that stocks look forward and “the S&P 500 already suffered through a bear market in 2022.”

But there’s no denying the dangerous signals in the market.

The regional banking crisis saw the closure of three banks holding a total of $532 BILLION in assets, greater than the combined assets of the 25 banks that failed in 2008.

Record-high borrowing costs — thanks to the Federal Reserve’s ten consecutive interest rate hikes — have put the brakes on the entire economy. We’re now seeing weak corporate earnings, a meltdown in commercial real estate and a flattened residential real estate market.

The US gross national debt exceeded $32 trillion as of last Friday, in the wake of congress agreeing to suspend the debt ceiling. Americans’ household debt level has reached all-time highs, setting a fresh record at $17 billion in the first quarter.

None of these issues have been resolved, but the market doesn’t seem to care. Are the bulls seeing something the rest of us are missing?

Central banks continue stacking up on gold

Central banks do not seem to share retail investors’ confidence in US stocks and the US dollar.

The Central Bank of Hungary (Magyar Nemzeti Bank) purchased over 60 tons of gold in March, tripling its gold holdings. The MNB increased gold reserves as a “risk mitigator” for expected “disruption during a period of transition in the international monetary system.”

Hungary is not the only nation increasing their gold reserves. In the past three years, Poland, Serbia, China, and dozens of other central banks have significantly added to their gold reserves as a line of defense in unstable market conditions.

Gold has come off its record high in May:

These levels are presenting superb opportunties to enter the gold and silver markets.

Gold/Stocks Ratio

If we divide the gold price by the S&P 500, we get the gold/stocks ratio. When the ratio is high, gold is overvalued compared to stocks. When the ratio is low gold is undervalued.

The strength in the stock market has pushed the ratio down by nearly 13% since May, providing strategic entry points for gold:

Who’s Correct? The Longer-Term View

The perma-bulls are chomping at the bit for another stock rally.

Consumers are still spending, and unemployment is low. And the tech sector has been buoyed thanks to the rapid growth of AI. If you think we’ve returned to the status quo, maybe it’s a good time to pour back into the stock market.

But central banks opting for security say otherwise.

The bearish indicators – debt, inflation, bank failures, de-dollarization – are like an unresolved argument in a marriage. The longer they bubble under the surface, the greater the risk of an even bigger eruption in the future. We are still on the “bust” side of the secular boom/bust cycle, which means gold should be the big winner in the coming years.

When the turning point finally does arrive, it sure will be nice to own some gold.

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As always, thank you so much for reading – and happy investing!

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