There are a lot of fundamental reasons to be bullish about gold right now.
Perhaps the most common reason is that the world is a tumultuous place and gold has endured as a store of value over the millennia.
More recently, central banks have been snapping up gold.
Though Turkey has been selling gold because it needs dollars, China remains a big buyer, having added gold to its reserves every month for 17 months.
The dollar remains weak and is likely to stay that way with a Fed chairman who will be looking to cut rates. (A weak dollar is typically bullish for gold.)
But what are the markets telling us about whether it’s a good time to buy gold?
To see how gold is valued compared with stocks, I created charts that show the ratio of the price of gold to the S&P 500.
Let’s pan out to the big picture and look at a 25-year chart.
Right now, gold is trading at 0.65 times the price of the S&P 500.
It appears to be emerging from a 10-year base. It is also sitting right at the 200-month moving average. A sustained break above that level would suggest gold prices are likely to accelerate versus the S&P.
That doesn’t necessarily mean that gold goes up and the S&P goes down. I’m bullish on stocks, so if the index continues to rise (as we know it does over the long term) and gold narrows the gap between it and the S&P 500, gold prices will climb significantly.
For the short term, let’s look at a daily chart over the past year.
The ratio has been falling since January as gold has come off its highs.
It’s getting very close to the rising 200-day moving average, which should act as support.
Additionally, the bottom panel is a stochastics indicator, which measures momentum. It is very oversold and starting to turn higher. That’s a bullish signal.
If this were a stock, I’d be eager to buy it, as it is in an uptrend and coming into support with momentum starting to shift.
Once gold makes its next move higher, if the ratio gets through the 200-month moving average, I wouldn’t be surprised if it moves closer to 1.0, which would mean the price of gold would be in line with the S&P 500.
Even if the S&P didn’t budge from current levels, that would suggest a 56% increase in the price of gold. And if the S&P continues to rise, the gain in gold would be even higher.
There are a lot of reasons to like gold right now. Its relationship to stocks is another one.