Gold prices soared to a new record high Monday above $1,400 (U.S.) an ounce, which is big news because it says a lot about investor confidence, or lack thereof, in the U.S. dollar and the effects of QE2.
But at times like this, a little historical perspective is required. Fidelity Investments has tracked gold prices relative to the S&P 500 since the gold standard was abandoned in 1971, and looking back over 40 years it is clear the commodity traded at a much higher premium in the '70s and '80s.
To get a sense of where the ratio stands today, gold prices are about 1.15 times the index value of the S&P 500. Although it has been 20 years since these levels were reached, they are nothing compared with the ratios of 2 to 6 times the S&P 500 in the late '70s and early '80s. You might say that was a very turbulent time for the economy, but things are also shaky today and the ratio isn't spiking.
It is important to keep this difference in mind because it means people aren't pulling all of their money out of stocks and throwing it into gold. However, there definitely has been a strong upward trend since the tech bubble popped. In 2000 the ratio was around 0.2 and today it is over 1. If gold prices continue to soar and equity markets stay flat, things could get interesting, but for now, it isn't so easy to say that gold prices are much too high.