Gold is inherently a stronger currency than the USD. This is because the total supply of gold increases by about 1.5% every year, whereas the total supply of US dollars seldom grows at a rate of less than 4% per year and periodically experiences double-digit annual percentage growth. As a result, the US stock market should peak in gold terms well before it peaks in USD terms, which is exactly what has happened in the past.
The following weekly chart shows the S&P500 Index in gold terms since 1980. With regard to the past 25 years, the two peaks that stand out on this chart occurred in September 2018 and July 1999. In the first case, the peak in the SPX/gold ratio preceded the SPX’s nominal dollar peak by about 16 months (the SPX didn’t peak in dollar terms until February 2020). In the second case, the peak in the SPX/gold ratio preceded the SPX’s nominal dollar peak by about 8 months (the SPX peaked in dollar terms in March 2000).
The most recent peak in the SPX/gold ratio occurred at the beginning of December 2021. Based on what’s happening on the monetary and economic fronts, we think that this will turn out to be a major top (a top that holds for at least 3 years). At this stage, however, what we have is a pullback to the 200-week MA, which would be consistent with either an intermediate-term correction within an on-going major upward trend or the first leg of a new major downward trend.
The point we want to make today is that even if the decline over the past three months of the SPX/gold ratio was the first leg of a new major downward trend (the most likely scenario, in our opinion), it would not be out of the ordinary for the SPX to make a new all-time high in dollar terms during the second half of this year or the first half of 2023.