Gold or the S&P 500? Cash or Stocks?

Given the bounce in the stock market this past week, and the resurgence of bullish euphoria surrounding this event, it is worthwhile to take another look at how the stock market is really doing.

I have been recommending that investors remain in cash while waiting for stocks to resume a more reasonable level of valuation. In my commentary this past July 10th ("Think Twice About the Stock Market") I noted that gold was the better buy. It still is, and investors will continue to benefit by waiting in cash, but not dollar-cash. They need to be holding gold-cash.

In gold terms, stock prices have been falling. As the purchase power of gold climbs, stocks are becoming cheaper. Even though stocks may be rising when we look at their prices in terms of dollars, they are falling when we look at prices in terms of gold. This result can be seen on the following chart, which measures the S&P 500 in terms of goldgrams. Since peaking in 2000, the goldgram price of the S&P 500 has been falling, which is another way of saying that gold's purchasing power has been rising.

The above chart presents weekly closing prices. On Friday, July 8th (the weekly close before my July 10th alert), the goldgram price of the S&P 500 was 89.13gg. In other words, it took 89.13gg to purchase the S&P 500.

This past Friday, November 4th, the S&P 500 was 83.17gg, a decline of 5.96gg, or 6.7%. So over these past four months, you did 6.7% better by holding gold than the S&P 500 (or about 6.2% better after accounting for dividends earned on the S&P 500 during this 4-month period). I expect this trend to continue.

Therefore, continue to follow the safe strategy. Stay in cash (i.e., gold) while waiting for the price of stocks to drop to more reasonable levels.

There is one other point to note about the above chart. For nearly three years, the goldgram price of the S&P 500 had been consolidating within a "flat-triangle" pattern after the sharp fall from its 2000 peak. As I noted in my July 10th commentary, this "consolidation pattern appears to be ending, as it is now approaching the top of its downtrend channel. This chart therefore suggests that the goldgram price of the S&P 500 will fall because the S&P 500 is about to fall in dollar terms, the dollar price of gold is going to rise, or both."

The price broke out of the pennant, so the consolidation pattern has indeed ended. The downtrend in price is now resuming, notwithstanding last week's bounce. The S&P 500 is again falling within its long-term downtrend, so its price is becoming cheaper - in other words, the purchase power of gold is climbing.

So my recommendation remains the same. Ignore the bullish hype about the stock market, and stay in cash (i.e., gold) until the stock market returns to a better value (i.e., a much lower price in terms of goldgrams).

Published by GoldMoney
Copyright © 2005. All rights reserved.
Edited by James Turk, alert@goldmoney.com

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