Are Gold Prices Related To Demographics?

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Includes: AGOL, DGL, DGP, DGZ, DZZ, GLD, GLL, IAU, PHYS, SGOL, UBG, UGL
by: Glenn Morton

I read with interest the San Francisco Fed's report on demographics and P/E ratios, and thus, through them, stock prices.

Their thesis is that when the ratio of the 40-49 year-old part of the population to the 60-69 year old part of the population is high, there are lots of producers, lots of consuming, and P/E ratios go up and thus the stock market rises. When that ratio drops, the P/E ratios drop and the stock market drops. They present an interesting case with a good correlation between this demographic ratio to the P/E ratio of stocks.

What struck me when I saw the chart was that this demographic ratio is anti-correlated to the price of gold. When the demographic ratio is high, and the P/E ratios are high, gold price is low, and when that ratio is low, and the P/E ratio is low, gold prices peak. I took their Figure II and used Powerpoint to quickly sketch on the chart an approximate gold price history. I used a scaled picture of the gold chart as back drop for my hand drawing on top of Figure 2.

What one can immediately see is that gold peaked in the early 1980s just about at the trough in the demographic ratio. Gold also began rising just about when the demographic ratio peaked.

Figure 2 of Liu and Spiegal (2011) with gold prices sketched in

Why would this be?

The most obvious possibility is that when the ratio is low and stocks are falling or giving poor return for the risk, people turn to gold as a place of safety. If this is so, then the Fed's prediction for stock prices would say that gold has a bright and shiny future

Disclosure: I am long physical gold.