What Does the S&P 500-to-Gold Ratio Signal?

TL;DR

A monthly S&P 500-to-gold ratio close below roughly 1.4 would warrant seriously considering recession risk, based on the historical comparisons presented. The ratio has not broken down yet and could rebound, but prior breakdowns in 1973 and 2008 coincided with recessions and major stock-market corrections.

Transcript

Hey everyone and thanks for jumping back into the macroverse. Today we're going to be talking about a very important chart, specifically the stock market, the S&P 500 on its valuation against gold. And we're going to talk about what this chart means, what it has historically meant. If you guys like the content, make sure you subscribe to the channe... Read More

Key Insights

• The S&P 500-to-gold ratio is near a historically significant zone around 1.4 to 1.45. The ratio reached approximately 1.44 during the 2020 recession, and a monthly close below 1.4 would substantially strengthen the case for considering another recession.
• A ratio breakdown occurred before or during serious market stress in 1973 and 2008. The 1973 episode was followed by a roughly 50% stock-market correction, while the 2008 breakdown also coincided with a recession and a similarly large correction.
• A metals peak would not automatically cause capital to rotate back into risk assets. Historical ratio breakdowns did not produce immediate mean reversion, so stocks could remain weak against gold even if gold experiences a correction after a potential blowoff top.
• The ratio can decline without an outright stock-market crash. During the period leading toward 1980, stocks largely moved sideways across a lost decade while gold rose, demonstrating that relative underperformance can result from gold appreciation rather than falling nominal stock prices alone.
• The current recession signal is not confirmed because the stock market recently reached a new all-time high. A decline in stocks, especially alongside continued gold strength, could quickly push the ratio through support and make the recession interpretation more compelling.
• The unemployment rate is rising primarily because companies are not hiring enough new workers, while layoffs and discharges remain relatively low. Possible explanations mentioned include monetary policy, reduced demand, and the replacement of some entry-level jobs by artificial intelligence, but no single cause is established.
• Youth unemployment is materially higher than unemployment among prime-age workers. The unemployment rate cited for people aged 16 to 19 is 15.7%, compared with 8.2% for ages 20 to 24 and 3.7% for ages 25 to 54.
• Economic weakness is not yet geographically universal. Unemployment rose in 27 states over the preceding six months but did not rise in 23 states, whereas the 2001 and 2008 recession examples involved rising unemployment across essentially every state.

Questions & Answers

Q: What does the S&P 500-to-gold ratio measure?

The ratio compares the stock market's valuation, represented by the S&P 500, with gold. A falling ratio means stocks are losing value relative to gold, although that can happen through falling stock prices, rising gold prices, or both. The chart is useful because historically important breakdowns have occurred near recessions and large stock-market corrections.

Q: What ratio level could signal a recession risk?

The key area discussed is approximately 1.4 to 1.45. The ratio is cited near 1.45, while its 2020 recession low was approximately 1.44. A monthly close below 1.4 would be a stronger reason to take recession risk seriously, although it would not reveal the recession's eventual depth or guarantee one occurs.

Q: Why is a breakdown against gold concerning for stocks?

Previous breakdowns near this valuation zone coincided with serious economic and market weakness. When the ratio broke down in 1973, the stock market subsequently experienced a roughly 50% correction and a recession followed. A comparable breakdown occurred in 2008 during another recession and major correction, making the present support area historically significant.

Q: Could the S&P 500-to-gold ratio rebound instead?

Yes. The ratio has not yet broken down, and it could bounce from its current support area, potentially postponing the concern for several years. It also rebounded after reaching similar territory in 2020, when monetary expansion helped markets recover. The analysis therefore treats a breakdown as a risk scenario rather than a confirmed outcome.

Q: Will a gold peak cause money to rotate back into stocks?

A gold peak would not necessarily lead to an immediate rotation into risk assets. The historical examples presented show that once the stock market broke down against gold, the ratio did not automatically mean-revert. Even if gold corrects after a potential blowoff top, stocks could continue underperforming and the ratio could keep falling instead of recovering.

Q: Why is unemployment rising if layoffs remain low?

The unemployment rate is described as rising because companies are hiring fewer people, not because layoffs and discharges have surged. New entrants to the labor force consequently face greater difficulty finding jobs. Suggested explanations include restrictive monetary policy, reduced demand, and artificial intelligence replacing some entry-level work, although the precise cause remains uncertain.

Q: Which age groups face the highest unemployment rates?

The youngest workers face the greatest reported difficulty. Unemployment among people aged 16 to 19 is cited at 15.7%, while the rate for those aged 20 to 24 is 8.2%. By comparison, unemployment for people aged 25 to 54 is 3.7%, indicating that labor-market weakness is concentrated more heavily among younger entrants.

Q: Does a falling stock-to-gold ratio require stocks to crash?

No. The ratio can fall because stocks decline, gold rises, or both happen together. Around 1980, the chart looked extremely weak even though stocks had largely moved sideways through a lost decade rather than suffering a Great Depression-style collapse. Rising gold alone can therefore drive substantial relative underperformance by the stock market.

Summary & Key Takeaways

• The S&P 500-to-gold ratio is approaching a historically important support area near 1.4 to 1.45. Similar levels appeared around recessions or recession scares, including 1960, 1973, 2008, 2016, and 2020. The ratio has not confirmed a breakdown, so a rebound remains possible.

• A breakdown would not necessarily reverse when metals eventually reach a blowoff top. Historical examples suggest that stocks can continue weakening against gold during recessions, either because stocks fall, gold rises, or both occur. The 1973 and 2008 comparisons featured substantial stock-market corrections after the ratio weakened.

• Labor conditions provide additional reasons for caution, although they do not yet indicate uniform economic weakness. Unemployment has been trending higher largely because hiring is weak, while layoffs remain relatively low. Younger workers face higher unemployment, and 27 states experienced rising unemployment during the preceding six months.