Seeking Alpha

There's No Way To Value Gold, But Valuing Stocks Is Becoming Equally Elusive

by: Vladimir Dimitrov, CFA
Vladimir Dimitrov, CFA
Long only, long-term horizon, contrarian, insider ownership

There is no way to put a fair price on gold, but it appears that valuing many businesses is becoming equally elusive.

The trend of asset prices becoming ever more disconnected from fundamentals has been going on for a number of years and is now accelerating.

One of the most extreme examples of this comes from the electric vehicles space, where the connection between fundamentals and prices is almost non-existent.

Holding high-quality businesses where fundamentals still matter in combination with gold exposure and cash at hand is how I avoid losing my mind during these extraordinary times.

There Are Decades Where Nothing Happens; And There Are Weeks Where Decades happen

Vladimir Ilyich Lenin

The land of no fundamentals

Fundamentals do not seem to matter anymore. At least not as much as they used to. From employment, PMI, GDP, consumer spending to corporate profits, margins, and return on capital - all these metrics are slowly losing their relevance for the stock market prices.

The disconnect between fundamentals and the equity market is not something new but has been going on for a number of years now.

Source: data from and Yahoo!Finance

I first wrote in more detail about the issue back in December of last year when I showed how the business cycle has been managed through loose monetary and fiscal policies. Thus every time changes in the Leading Economic Index (LEI) started approaching negative territory either the monetary or fiscal authorities brought it back to life.

The disappearing relationship between equity valuations and the real economy is also evident from the S&P 500 dividend yield and the Purchasing Manager's Index (PMI) which at first glance appears to be relatively stable over time.

Source: Quandl and

However, if we divide the above period into three sub-periods, we will observe how the relationship has been steadily disappearing. From R-squared of 76% in the 2003-09 period to 53% in 2010-16 and finally to 23% during the past 3 years.

Source: author's calculations based on data from Quandl and

And when fundamentals do not matter, trying to forecast the equity market or where valuations would be 6, 12, or 18 months from now is anybody's guess.

The recent events have also hit hard the consumption side of the GDP as personal income (excluding current transfer receipts) contracted sharply since the pandemic. However, due to the current transfers, real income has, in fact, temporarily increased.

And not surprisingly consumption fell off a cliff while the savings skyrocketed, many of which found their way back into the stock market.

In a nutshell, if the Fed could go all out on its unlimited QE and expand its balance sheet from $4tn to more than $7tn in a matter of weeks than why not continuing to go even higher? Or if corporate bonds are now under scope of those purchases then why not go into equities as well? If the Fed is willing to do basically anything to support prices then asset price inflation could easily continue, even if fundamentals deteriorate further.

If returns made are now entirely dependent on policy-making decisions rather than price discovery and market forces then why bother with analysis at all when as long as the Fed is your friend you can just continue buying the riskiest assets there are. Thus, for many retail investors that jumped on "buy the dip mentality" and started investing or became heavily exposed to equities, the environment is far riskier than they expect.

Retails investors jumping in

At present, when the disconnect between the main street and asset prices is growing ever larger, retail investors are finding this to be a great opportunity to pile into stocks.


More retail investors entering the equity market is not necessarily a bad thing if they are following a prudent, long-term, and well-educated strategy to the markets. However, this "generational-buying moment" seems to be focused around:

  • favoring mostly troubled names with cheap valuations


  • Using options left and right

  • piling into worthless assets


  • and, of course, went in for the Nikola Tesla trade

Electric vehicles topic seems to be the epicenter of investors' excitement. Alongside the current leader in the space Tesla (TSLA), almost every other new name in the space got the attention of retail investors.

Nikola (NKLA), a company with no revenues, doubtful sustainable competitive advantages, and only hopes of high future returns became one of the most valuable automakers (although not being a maker yet).

With revenue forecasts exhibiting the typical "hockey stick" pattern, the company is expected to go from zero sales today to more than $3bn in a matter of 4 years. Thus, NKLA now has a market cap of around $26bn which values it at around x8.0 times its 2024 expected sales.

If NKLA is trading at x8.0 times its 2024 sales, then why not forecast 2025 sales and trade at 8 times that? Surely, visibility of 2025 sales is not materially different to that of 2024, then who is to say that the company will not double its sales again in 2025 and trade at 8 times that number today?

Just as a comparison, TLSA which is considered to be the leader in the space, had the first-mover advantage and a significant cult to personality to its CEO and actually did a pretty good job at increasing sales since its IPO in 2010, has never been trading anywhere near these multiples.

As a matter of fact, even the price to next year sales never reached those of NKLA's current price to sales in four years ratio.

Source: author's calculations based on data from Seeking Alpha

This begs the question, how is this valuation being determined? Well, it is just a number at this point, it could be $26bn market cap just as easily as it could get to $50 or $0 for that matter.

Similarly to the overall equity market which is slowly disconnecting from fundamentals, the hottest sectors and names within them take this trend to extremes.

And, of course, retail investors, or the companies purchasing the trading activity data of those retail investors are driving these bubbles.


How do you stay sober from all this

One thing seems certain, the period we live in will make a very interesting chapter in future textbooks - negative interest rates, negative oil price, companies with no sales becoming one of the most valuable businesses, investors piling in into bankrupt companies, etc.

I, personally, don't feel compelled to participate in a meaningful way in all this. After all, if asset prices are set arbitrarily and are disconnected from any fundamentals then investing becomes much closer to gambling, while solid analysis is meaningless and the only game in town is just how much assets is the Fed going to buy.

Apart from keeping a significant amount of cash, the following strategy seems to be the most prudent to me at this point:

Holding gold as part of my portfolio has been an excellent choice from a risk-reward perspective. I personally prefer having exposure through ETFs that track the price of the precious metal, such the SPDR Gold Shares (GLD), and through physical gold. Since I am based in the UK, I use WisdomTree Physical Gold instead of the GLD and I also keep a small position in a gold mining company called Equinox Gold (OTC:EQX).

ChartData by YCharts

Since I first wrote about my reasons for holding gold in addition to my equity portfolio in "Why Caution Is Required As Never Before And The Case For Investing In Gold", the precious metal has returned around 34%, compared to 11% for the S&P 500. As seen above the precious metal has outperformed the S&P on a non-risk adjusted basis over the past three years as well. However, the whole point of keeping exposure to gold is not to outperform the equity market, but rather as a hedge to current risks of the financial system.

The topic of why holding gold makes sense in the current environment is quite long and could hardly fit into one article. That is why I put some of my best ideas into the following pieces:

Disclosure: I am/we are long HKHHF, GM, CLF, LBTYA, ASBFY, EQX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.