Gold’s Undervaluation Relative to Stocks: More Upside?

The WGC (World Gold Council) released a report on gold ETF flows on June 4. According to the WGC data, the gold-backed ETFs added 154 tons of across all of the regions in May.

Highest gold ETF inflows

In US dollar terms, the year-to-date inflows of $33.7 billion have exceeded the highest level of annual inflows of $24 billion recorded in 2016. The SPDR Gold Shares (NYSEARCA:GLD) has seen gains of 14.5% since March 18. The VanEck Gold Miners ETF (NYSEARCA:GDX) has amplified these returns by gaining 53% during the same period.

Factors favoring gold prices

Lately, investors have been buying gold due to many factors. Gold gains in times of fear and uncertainty. COVID-19 created unprecedented uncertainty in the market. Also, the relations between the US and China have taken turn for the worse. The US economic situation is also very precarious. The US unemployment rate at 13.3%. The Federal Reserve and other central banks are on a money printing spree. Easy money leads to currency devaluation and inflation. All of these factors created an environment that’s perfect for gold prices to soar.

Budget deficits and high valuations leading to gold ETF inflows

According to WGC commentary, “As investors look to hedge the economic risks of ballooning budget deficits and high valuations for both stocks and bonds, collective holdings of gold ETFs have now surpassed Germany’s official gold reserves and exceed the official gold reserves of every country except for the US.”

Hedge fund managers turn bullish on gold

Hedge fund managers have also turned bullish on gold. Financial Times reported that Elliott Management, Caixin Associates, and Dymon Asia Capital bet on gold in 2020. To learn more, read Gold Prices: Undervaluation, Smart Money Piles Up.

Analysts project a huge upside for gold price

Many Wall Street analysts expect a huge upside for gold. Bank of America expects gold prices to reach $3,000 per ounce in 18 months. JPMorgan Chase advises that investors hedge their risks with gold as pandemic-induced uncertainty rises. UBS thinks that gold has “growing potential” to break $1,800 per ounce.

Gold’s undervaluation relative to stocks

Many market participants argue that gold prices remain undervalued at a time when US stock markets seem increasingly overvalued. Companies have withdrawn their guidance due to uncertainty amid COVID-19. Currently, the GLD to the S&P 500 (NYSEARCA:SPY) ratio is 0.55. The ratio is much lower than the last ten-year average, which is 0.73. If a mean reversion occurs, gold prices will rise or equities will fall.

Read Gold Prices Soar: Which Stocks Do Analysts Favor? to learn about analysts’ favorite stocks in this environment.