The price of gold continues to climb towards USD$700. And the dollar, at a 10-year low, seems to be giving up ground against other currencies.
Is gold too high or too low? How about the dollar?
In the stock market, it is fairly easy to say whether prices are high or low. You just look at the expected return. Dividend yields are less than 2%. Which means, you are paying $50 for every $1 of annual dividend income – not very good; you can get more than twice as much by putting your cash into a money market fund.
Or, if you look at it in terms of earnings, you find the typical Dow company priced at about 18 times earnings. You pay $18 for $1 of company earnings, in other words – still not very good. At low points, you can get a dollar’s worth of earnings for only $5 to $10, which is another way of saying that the $1 of earnings you buy now for $18 is a risky proposition. Because, if the stock market were to go back down – as historically, it always has – you would lose as much as $13 by the time it reached bottom. And then, if the patterns of the past repeat themselves, you could wait another 20 to 30 years before prices returned to these levels.
So, stocks are simply expensive…and not, on the average, worth the risk.
But what about gold and the dollar? A few years ago, a barrel of oil was worth USD$15…and an ounce of gold USD$300. A single ounce of gold would buy 20 barrels of oil. Now, you can only buy about 12 barrels of oil with an ounce of gold.
Is oil too expensive…or gold too cheap? Or were they merely mis-priced seven years ago?
We don’t know, but when people are fearful they buy gold for safety. When they are confident they buy investments for profit. Now, by all the evidence, they are flush with cash and confidence. When that bullish sentiment swings the other way, gold should go up.
The Daily Reckoning Australia
Is gold too cheap? What about oil? Leave a comment below.