So far this year, precious metal stocks are up 57% year-to-date, and gold is heading much higher. The Dow-to-gold ratio illustrates the enduring inverse relationship between gold and the Dow Jones Industrial Average.
This ratio’s historical chart shows long periods favoring stocks and long periods favoring gold. Today falls firmly within an era to own gold – and it has a long way to run.
The relationship between stocks and precious metals underscores the need to hold precious metal stocks and challenges the legitimacy of a traditional 60:40 portfolio. Although the Dow is due for a short-term bounce, gold still has years before it reaches fair value. To match its 1980 price peak in real terms, gold would sell for $40,000 per ounce, while silver would reach $2,500 per ounce.
There is a long runway ahead for commodity-related stocks. Supply remains tight because new mines take years to build before production can meet growing demand.
The CAPE ratio for the S&P 500 tells a similar story. It measures stock prices relative to cyclically adjusted earnings and, like the Dow-to-gold ratio, indicates that stocks have hit a ceiling and are heading lower. After reaching its trend-line twice and getting rejected both times, the CAPE ratio suggests a market favoring low P/E companies, classic defensive names, and inexpensive cash cows
One such classic defensive company, Anheuser-Busch InBev, is up 37% year-to-date. Alamos Gold has gained 44%, while the GDX index is up 57%.
As gold hits new all-time highs each week, companies like Alamos Gold produce record cash flows. This is where investors can find profits today. When the economy slows and uncertainty rises, capital flows into defensive companies to weather the storm. There are always opportunities to make money – right now, they’re in the out-of-favor names that have been overlooked during the explosive bull market of the last fifteen years.
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Disclaimer: The author owns shares in the precious metal companies discussed in this article and is a long-term investor who publishes newsletters and consults with private money managers. He holds no credentials to give investment advice, nor does this article constitute advice. It is for informational purposes only. While every effort is made to ensure accuracy, market volatility makes perfect precision challenging. Readers seeking advice should consult accredited financial advisors or legal counsel qualified to provide such guidance.
