Stocks relative to gold; depressed but rising

 

I post these charts as a partial answer to a reader's question. Larry Kudlow has lamented the fact that although stocks are up in nominal terms, they haven't risen relative to gold. His observation is correct, but only if you consider the last few months of price action, or if you compare today to the end of last year. As the bottom chart here shows, stocks relative to gold are up about 39% from their early March '09 lows. From a long-term perspective, stocks are depressed relative to gold. It's a mixed bag: stocks are trading at depressed levels relative to gold, but on the margin things have improved.

I have drawn a 1% trend line on the chart for no particular reason, other than it seems to fit. If the line makes any sense at all, it is that financial asset prices (note that the S&P 500 index throws off a couple percent in dividends each year which are not included in this chart) tend to outperform the prices of physical things by about 1% a year on average. That's not strange, since financial assets represent a claim on productive assets, while gold is merely a proxy for tangible assets (land, commodities, etc.).