While gold may have bottomed in nominal terms at $1,045/oz in December 2015, it wasn't until one year ago (August 2018) that gold bottomed relative to US equities:

Gold/S&P 500 Ratio (Weekly)

A seven year bear market in gold relative to stocks (2011-2018) came to an end one year ago - last August gold reached a low of $1,167/oz while the S&P 500 was sitting at 2850 and steadily climbing higher.  Since then the S&P has barely made any progress while gold has risen ~30%. 

A monumental paradigm shift is underway across global financial markets and the gold/S&P 500 ratio chart is one of the most poignant illustrations of this seismic shift. Last month, billionaire hedge fund manager Ray Dalio wrote a blog post titled "Paradigm Shifts" in which he made a strong case for increased portfolio allocations to gold based upon the following premise:

"To me, it seems obvious that they have to help the debtors relative to the creditors. At the same time, it appears to me that the forces of easing behind this paradigm (i.e., interest rate cuts and quantitative easing) will have diminishing effects. For these reasons, I believe that monetizations of debt and currency depreciations will eventually pick up, which will reduce the value of money and real returns for creditors and test how far creditors will let central banks go in providing negative real returns before moving into other assets."

This is powerful stuff and it's difficult to find a flaw in Dalio's logic. I highly recommend that everyone read Dalio's piece if they haven't already because not only does he make a strong case for gold, but he also lays out why the coming paradigm shift is likely to be hostile for equities. This will be due to tax increases and shrinking corporate profit margins amid many other negative factors that are likely to hurt equity returns. 

Returning to the gold/S&P 500 ratio and zooming out to a 20-year monthly chart we can see just how significant the August 2018 low could turn out to be:

Gold/S&P 500 Ratio (Monthly)

The .40-.45 area in the gold/S&P ratio represents long term support/resistance dating back to the 2002-2008 time period, thus it makes sense that it would find support after revisiting this important zone. The 14-period monthly Relative Strength Index (RSI) is confirming that a long term bottom has been completed, a monthly close above the .55 ratio level would project a further move higher to test the next zone of potential resistance between .65 and .70. 

What does a .70 gold/S&P ratio imply? Well, since we're talking about a ratio it could mean a few different things but most likely it means that gold will be well above current levels and the S&P 500 will be below current levels; a .70 gold/S&P 500 ratio could mean that gold in USD terms has risen to anywhere between $1,600 and $2,100 assuming the S&P doesn't fall more than 20% from current levels. 

Another important point to put into perspective is that relative to US large cap stocks gold experienced an eleven year bull market from 2000 to 2011 which was then followed by a seven year bear market from 2011 until August 2018. This means that gold is just completing its first year of a new bull market. If history is any guide gold has at least another 7-10 years of bull market tailwinds ahead of it. 

A monumental paradigm shift is underway across global financial markets and this shift favors precious metals and assets that benefit from the falling price of money.  Real returns from investments are going to become increasingly hard to come by and we have seen global bond markets respond by sending yields crashing through the floor, a trend that doesn't look like it's ending anytime soon. 

I will conclude by pointing out that I have used weekly and monthly charts to illustrate what I believe to be a key crossroads in terms of gold relative to US large cap stocks. This ratio will not go straight up and you can be sure there will be dips in gold and rallies in stocks along the way, however, in my estimation the bigger picture trends are clear and gold is likely to significantly outperform US large cap equities over the next several years. 

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