Happy Thursday, GoldBuzzers!

Gold’s fall from January’s record has brought the word “bubble” back. Rather than argue about it, in today’s Real Talk, I’ll be checking the past 56 years of price data to test it.

Ok. Let’s get into it. ⬇️

Gold finished Wednesday around $4,040 an ounce and silver slid toward $53.60, within about a dollar of its low for the year, after the Federal Reserve left rates unchanged at 3.75 to 4.00 percent. The vote wasn’t unanimous, and the dissent cut the hawkish way: two officials wanted a hike, not a cut.

Chair Kevin Warsh gave no firm signal on December, but markets have made up their minds, with CME’s FedWatch tool putting the odds of a hike at that meeting close to 80 percent.

Oil made life harder for the metals too. Brent pushed back above $115 a barrel after Houthi fighters claimed a missile strike on Saudi Arabia’s biggest refinery, and there are reports Washington and Israel could launch large-scale strikes on Iran after next week’s US midterms unless a deal comes together first. A shooting war in the Gulf would normally send buyers toward safety, but expensive oil feeds inflation, and inflation keeps the Fed talking about higher rates, which raise the cost of holding metal that pays no interest.

Until one side of that tug-of-war gives, expect more choppy days like this one, with December’s Fed meeting shaping up as the next real test.

Check live prices and this morning’s gold and silver commentary at our sister site, GoldPrice.Live

Gold’s had a rough nine months. It hit a record $5,420 on January 28 and has since slipped to around $4,040, a fall of over 25 percent. Silver’s taken a heavier hit, down more than half from its own January high.

When prices drop that far, people start talking about a bubble. It’s a fair thing to ask, so I tested the theory against 56 years of price data.

Measuring gold against the stock market

One of the simplest ways to judge whether gold is expensive is to ask how much of the stock market an ounce will buy. Divide the gold price by the S&P 500 and you get a single number. A high number means gold is pricey compared with stocks, and a low one means it’s cheap.

The first chart tracks that number since 1970.

At the top of the 1970s gold boom in January 1980, one ounce bought 7.5 units of the S&P 500. At the 2011 peak it bought 1.7. That’s what a gold bubble looks like on this chart: a tall spike that leaves the long-run average far behind.

This time, the ratio topped out at 0.78 in January. The median since 1970 is 0.70, so even at the very top of the run, gold was only a little pricier against stocks than on a typical day over the past half-century. Today the ratio’s at 0.52. That’s below the median and lower than on nearly two-thirds of all trading days since 1970.

Where each run started, and how far it went

Past gold bull markets didn’t stop at a modest gain against stocks. In the 1970s, the ratio climbed from 0.37 to 7.5, a twentyfold rise. From its 1999 low of 0.18, it rose more than ninefold by 2011.

When gold broke out in March 2024, the ratio stood at 0.41. At January’s peak it had risen to 0.78, less than double.

The fair objection

Part of the reason gold looks cheap on this measure is that stocks have been so strong. The S&P 500 is now more than 11 times higher than its March 2009 low. So this chart is as much about expensive stocks as it is about cheap gold.

It’s also unrealistic to expect a return to 1980. Back then, inflation was in double digits and interest rates came close to 20 percent.

You don’t need anything that extreme for gold to go much higher, though. If the ratio simply went back to its 2011 peak, with the S&P where it is today, gold would trade at around $13,000. My forecast of gold above $10,000 needs a ratio of 1.29, which is still well below the 2011 level.

Gold has fallen like this before

Big pullbacks have also been part of every major gold bull market. The second chart lines up the current drop against the two most famous ones.

Between December 1974 and August 1976, gold fell 46 percent, from $193 to $104. Over the next three and a half years, it rose eightfold to $835. In 2008, gold lost 29 percent in eight months as the financial crisis hit, then went on to reach $1,897 by 2011.

Today’s 25 percent drop, nine months in, has followed almost the same path as 2008.

What about silver?

Silver’s 54 percent fall is harder to shrug off. It’s the kind of drop that shakes people out. The ratio still tells a similar story, though. In January, an ounce of silver bought 0.017 units of the S&P 500. In 2011 it bought more than twice that, and in 1980 it bought more than 25 times as much. Silver’s also done this before: in 2008 it lost 57 percent in eight months, then climbed to $48 by 2011. It’s always been the more volatile of the two metals, both up and down.

The big picture

A bubble is a price that runs far beyond anything history can justify. On the measure that flagged both of gold’s previous tops, this run never got close. Gold got a little ahead of itself in January and has spent nine months giving some of that back, much as it did in 1976 and 2008. That’s what a consolidation phase looks like. And with the ratio where it is today, gold has a very long way to climb before it looks expensive against stocks again.

That’s all for this Thursday, folks. I’ll see you on Sunday.

Before you go, please take a moment to rate today’s newsletter and tell us how we did.

Rick Adams
Founder, GoldBuzz
rick@goldbuzz.com