by
Co-Head of Real Asset Strategy

Analysis and outlook for the real assets market

  • Gold may not be expensive at today's price, but we believe it is not glaringly cheap either.

What it may mean for investors

  • Silver and platinum look to be better buys at today's prices than gold.

Download the report (PDF)

Gold versus Other Assets

Today, we would like to discuss the value of gold at $1250 per ounce. Even though gold is down $650 per ounce from its 2011 high, its valuation remains a concern. History suggests that the metal might be "dead money" for a few more years.

Gold may not be as expensive as it was 5-6 years ago, but we do not believe it is glaringly cheap either. Why this matters is that gold is first and foremost a commodity, and gold has tended to follow the performance patterns of the commodity family. Importantly, commodity super-cycles1 do not normally transition from bear markets to bull markets until commodity valuations are fully "washed-out." The bottom line on today's gold price of $1250 per ounce is that it does not appear washed-out enough for a new bull market to begin.

The best way to analyze whether gold sits at washed-out historical levels is to compare it to other major assets, such as bonds, stocks, and housing. We'll begin with Chart 1, which highlights the performance of gold versus each of these major asset classes since 1999. Falling lines indicate that gold is losing relative strength. Panel 1 is gold versus bonds, panel 2 is gold versus stocks, and panel 3 is gold versus housing. It's clear that gold has lost quite a bit of ground versus the other asset classes since 2011. However, we're not convinced that what you see in Chart 1 represents washed-out levels. Gold does not look cheap versus the average commodity either (as shown later in Chart 5). We will explain what we mean by "not washed-out levels" using the remaining charts.

Chart 1. Gold Spot Price in Terms of Asset Classes


Graphs of gold spot price to the Bloomberg Barclays U.S. Long Treasury Total Return Index; gold spot price to S&P 500 Total Return Index, gold spot price to U.S. Existing Home Sales Median Price Index. Contact your Relationship Manager for more information.

Source: Bloomberg, Wells Fargo Investment Institute. Daily Data: 1/31/1999 - 2/14/2017. Dates selected to highlight the beginning of the commodity bull super-cycle, and then its transition to the bear super-cycle in 2011. Gold to bond ratio is the price of gold divided by the Bloomberg Barclays U.S. Long Treasury Total Return Index value. Gold to stocks ratio is the price of gold divided by the S&P 500 Total Return Index value. Gold to house price ratio is the price of gold divided by the U.S. Existing Home Sales Median Price Index value.

The blue line in Chart 2 highlights the relationship between gold and U.S. Treasury bonds from 1968 to 2017. We use 1968 as the starting point because this was the year that the price of gold began to finally float freely, in anticipation of the U.S. exiting the gold standard in 1971. A rising blue line means that gold is outperforming bonds, while a falling blue line means the opposite. It is the level of the blue line that interests us. It has headed lower (gold losing ground to bonds) since 2011, but its current level has yet to approach the secular low of 2001—the jumping-off point for the last gold bull market. Our point being: the 2001 gold bull market was ignited after the price of gold bottomed versus bonds, a condition that is not present in February 2017.

The green line, which is called a regression-trend line, is also of interest in Chart 2. This chart plots the long-term historical relationship between gold and bonds from 1968-2017. Think of it as a historical measuring stick. The fact that the historical green regression line is sitting below the current blue line signals to us that gold is no great bargain compared to bonds.

The bottom panel plots the percentage difference between the blue and green lines. Yellow bars indicate that gold is expensive versus bonds, historically speaking, while the purple bars highlight that gold is relatively cheap.

Chart 2. Gold vs. Bonds (Regression Trendline)


Graphs comparing gold to Bloomberg Barclay's Long-Term Treasury Bond Total Return Index and Regression Trend Line. Contact your Relationship Manager for more information.

Source: © Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. Daily data 03/21/68 – 02/13/17. Past performance is not a guarantee of future results.

Chart 3 highlights the relationship between gold and the Dow Jones Industrial Average (DJIA) from 1968 to 2017. This chart takes the same basic approach as Chart 2, so we won't repeat every fine detail. The value messages here are more of the same. The yellow bars in the bottom panel indicate that gold looks expensive versus stocks. And the current blue line reading in the top panel is not as low as what we witnessed around 2001. However, today's reading is close to the 1971 low. All combined, these historical angles suggest that it's unlikely that gold has reached washed-out valuation levels versus stocks.

Chart 3. Gold vs. Dow (Regression Trendline)


Graphs comparing gold to Dow Jones Industrial Average and Regression Trend Line. Contact your Relationship Manager for more information.

Source: © Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. Daily data 03/21/68 – 02/13/17. Past performance is not a guarantee of future results.

Chart 4 shows that gold's value today versus housing is pretty much where it has averaged in the past. The blue line plots the relationship between gold and the median U.S. home price. Today's reading is much higher than the washed-out levels visited around 1971 and 2001. Gold today may not be expensive compared to the median U.S. home price, but it doesn't look washed-out cheap either.

Chart 4. Gold vs. Housing (Regression Trendline)


Graphs comparing gold to median home prices and regression trend line. Contact your Relationship Manager for more information.

Source: © Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. Daily data 03/21/68 – 02/13/17. Past performance is not a guarantee of future results.

Chart 5 highlights the relationship between gold and the average commodity since 1968. No matter how we slice this one, gold does not look washed-out compared to the average commodity.

Chart 5. Gold vs. Commodities (Regression Trendline)


Graphs comparing gold to Continuous Commodities Index (CCI) and Regression Trend Line. Contact your Relationship Manager for more information.

Source: © Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. Daily data 03/31/1968 – 02/17/2017. Past performance is not a guarantee of future results.

Lastly today, digging even deeper into the commodity pile, we find that gold looks expensive versus other precious metals. Chart 6 plots the price of gold versus silver, while Chart 7 plots the price of gold versus platinum; both charts cover the period from 1975 to today.

In the second panel of Chart 6, we can see that (as of 2/7/2017) an ounce of gold trades at 70 times the price of an ounce of silver. This is historically high compared to the 1975-2016 average of 59 times. Now, gold being much more expensive than silver has not historically signaled that gold should fall in price. What it does tell us, though, is that silver appears to be a better value than gold at today's prices. If one were to believe that a new bull market for precious metals is upon us (and we don't), silver looks to be the better value buy.

In Chart 7, platinum also appears to be a much better value than gold. In the second panel of Chart 7, we see that gold today trades at roughly a $200, or 20 percent, premium to platinum. This is a high gold premium; in the past, gold has averaged a 20 percent discount to platinum. Platinum today is a much better value buy than gold, should investors be hunting for precious metal plays.

Tomorrow, in our last gold publication this week, we will discuss what we believe gold and gold miners will do in 2017.

Chart 6. Gold vs. Silver


Graphs comparing the price of gold to the price of silver (in US dollars per ounce). Contact your Relationship Manager for more information.

Sources: Bloomberg, Wells Fargo Investment Institute. Daily Data: 1/2/1975 - 2/14/2017. Top panel is shown in log scale. Ratio is the price of gold divided by price of silver. Dates selected to show all available data from source

Chart 7. Gold vs. Platinum


Graphs comparing the price of gold to the price of platinum (in US dollars per ounce). Contact your Relationship Manager for more information.

Source: Bloomberg, Kitco, Wells Fargo Investment Institute. Monthly Data: 1/31/1975 - 1/31/2017. Spread is gold price minus platinum price. Dates selected for consistency to the gold vs. silver chart.


1 Commodity prices over the very long term (hundreds of years) tend to move in overall bull and bear cycles, some lasting decades. These are super-cycles.
image of gold bars

Last in the "Focus on Gold" series:

Gold and Gold Miners in 2017