There has been an astonishing synchronization between equity markets and the gold-silver ratio until 2011.
A rising stock market almost always coincided with a declining gold-silver ratio, i.e. with silver outperforming gold (see chart above). This may have been due to re-inflation being accomplished with conventional monetary policy – i.e., credit expansion by commercial banks – in previous cycles . This affected the real economy more quickly and fostered consumer price inflation. This time, re-inflation has been attempted by means of central bank securities purchases, which has led to price increases in investment assets, but has not been able to spur consumer price inflation.
Equity bull markets like the current one are usually not a positive environment for the gold price. From this perspective, it is plausible that the continuation of the gold bull market should coincide with the end of this equity rally (see chart below).
However, the Shiller-PE, which calculates the inflation-adjusted average price- earnings ratio (10 years trailing) since 1881, signals that the outlook for US stocks does not appear very enticing. The current level of 27x has been exceeded only twice in history.
A glance at the market capitalization of gold mining companies shows a similar valuation discrepancy. Currently, the Gold Bugs Index, which includes the 16 largest unhedged gold producers, is valued at a mere USD 55 billion. Compared to the S&P 500, this market capitalization is tiny, amounting to 0.3% of the index. The market capitalization of Microsoft alone is more than 6 times higher than that of all components of the Gold Bugs Index combined (see chart below).
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