Gold at $3,800/oz, Or Nominal GDP at $5 Trillion? Take Your Pick

Includes: GLD, SPY
by: Plan B Economics

By popular request (well, sort of) I've created another chart to help look at gold prices in the framework of relative valuations. There are so many ways to do this and all lead to a variety of answers (i.e. there is no 'right' answer). However, this type of analysis can help investors determine if an asset is in extreme oversold or overbought conditions.

My previous article compared the S&P 500 to gold prices and suggested that to match the 1981 peak gold valuation, gold would need to reach $7800/oz (or the S&P 500 would have to fall to 220).

A number of people have emailed me asking what this looks like when using GDP instead of the S&P 500, so I created the chart below.

Conclusion: using nominal GDP as a relative comparison, gold will not match the 'bubble' valuations of the early 1980s until it hits $3800/oz or nominal GDP falls to $5 trillion. However, as some have astutely pointed out, gold is not at extremely oversold levels either (like it was in early 2001).

Note: the numbers on the left axis don't represent an absolute value or price. They simply reflect the ratio.

Disclosure: I own some bullion