Economists often discuss the health of the economy in terms of how many ounces of gold the Dow or S&P 500 is worth . What does that mean exactly and why is it important?
Below is a series of charts that I hope will help explain the situation.
The first thing to remember is that stocks are valued in DOLLARS, and just like any other good valued in dollars, this means that distorting the dollar will also lead to distortions in stock prices.
You may have heard recently about the great run up in stocks since the 2008 crash and how this is a sign of a general recovery. Below is a chart of the S&P 500 Index (which I believe is a better indicator than the Dow Jones) since 2008. As you can see, there has indeed been an over 100% rise in prices since the low of the crash in March 2009. (You can right-click and open the charts in a new window for a better look.)
Now, if this recovery is due to the increase in the worth of the companies and a general recovery, as many economists/traders say, you would expect to see the price of stocks to also increase in terms of other valuations.
Below is a chart of the S&P 500 divided by the price of gold. This is the chart that people refer to when they talk about the value of the S&P 500 in ounces of gold. It is important to remember, when looking at this chart, that the exact price is not what’s important, since it’s just a ratio, but the percent change over time. As you can see, in terms of gold, the S&P 500 has actually been down since September 2009.
If you look at the S&P 500 in terms of silver, the picture is even worse.