S&P-To-Gold Ratio Flashes Generational Alarm
News Summary
Despite U.S. equities trading at fresh highs, numerous fundamental and technical indicators, such as rising bankruptcy filings, cratering market breadth, Robert Shiller's CAPE ratio near dot-com peaks, and Warren Buffett's market cap-to-GDP gauge, are flashing red. The latest alarm comes from the S&P 500-to-Gold ratio, which Danish economist Henrik Zeberg describes as a "one in a generation" signal. Historically, this ratio has only indicated a technical reversal three times—in 1929, 1971, and 2000—each marking the end of an era and signaling gold's outperformance over equities in the coming years. Technical indicators RSI and MACD have also just crossed lower, reinforcing this signal. Zeberg characterizes the current market cocktail of vanishing breadth, accelerating corporate defaults, and even tech leaders admitting a bubble as a setup for a "deflationary bust," where stocks and real estate crack under debt while gold quietly takes the relative win. Furthermore, Brent Johnson's "Dollar Milkshake Theory" suggests a rising U.S. dollar during global slowdowns, which would squeeze global assets but the S&P-to-Gold ratio filters out dollar noise to show true value.
Background
U.S. equities continued to reach new highs in 2025, a performance seemingly at odds with several traditional market health indicators. Corporate bankruptcy filings have seen a significant increase, and market breadth (a measure of how widespread market participation is) has plummeted to levels not seen since the 2008 financial crisis. Valuation metrics like Robert Shiller's Cyclically Adjusted Price-to-Earnings (CAPE) ratio are hovering near dot-com bubble peaks, and Warren Buffett's favored market cap-to-GDP gauge also signals a warning. The S&P 500-to-Gold ratio is a long-term market cycle indicator that has historically flashed generational reversal alarms only three times: in 1929 (before the Great Depression), 1971 (before the collapse of the Bretton Woods system), and 2000 (before the dot-com crash). Each instance preceded a significant long-term reversal in the relative performance of stocks versus gold. Concurrently, central banks worldwide now hold more gold than U.S. Treasuries for the first time in nearly 30 years, reflecting a significant global rebalancing of reserve assets, potentially signaling a challenge to traditional dollar hegemony and a renewed focus on hard assets. Brent Johnson's "Dollar Milkshake Theory" is a macroeconomic framework positing that during periods of global economic slowdown or crisis, the U.S. dollar tends to strengthen due to global demand for dollar-denominated funding and liquidity. This dollar strength places pressure on emerging markets, global trade, and dollar-denominated commodities, exacerbating tensions within the global financial system.
In-Depth AI Insights
What are the deeper implications of the S&P-to-Gold ratio flashing a generational alarm in 2025, especially under the current political climate of the Trump administration? This signal portends a potentially significant shift in the global economic landscape during President Trump's second term, with ramifications that extend beyond pure economic cycles. - The Trump administration's "America First" policies, including potential escalations in trade protectionism and further interventions in global supply chains, could exacerbate global economic vulnerabilities. This would drive capital towards perceived safety, enhancing the dollar's short-term appeal (as per the Dollar Milkshake Theory) but potentially eroding its long-term status as the global reserve currency. - Should a "deflationary bust" unfold, the Trump administration would face immense pressure to implement aggressive measures to stimulate the economy. This could involve further fiscal expansion, potential quantitative easing, or even pressure on the Federal Reserve to lower rates, a policy mix that might support markets in the short term but could exacerbate inflation or fiscal imbalances in the long run. - Gold's elevated relative performance in such an environment is not merely a reaction to market fundamentals but also likely reflects growing concerns about the long-term stability of the dollar as the global reserve currency, especially amidst heightened geopolitical tensions. How does the ongoing strategy of central bank de-dollarization and gold accumulation interact with the S&P-to-Gold ratio alarm and the potential "deflationary bust"? Central bank actions are not isolated events but rather structural shifts intrinsically linked to current market signals and macroeconomic forecasts. - The trend of central banks hoarding gold reflects a strategic imperative for diversification within the global financial system, reducing over-reliance on a single reserve currency (the.S. dollar). In a potential deflationary bust scenario, where equities and real estate are under pressure, gold's safe-haven properties become paramount, validating the foresight of central bank diversification strategies. - This de-dollarization trend could temper the magnitude or duration of any dollar spike predicted by the Dollar Milkshake Theory. If major economies' demand for dollars is reduced by their diversified reserves, the dollar's safe-haven appeal during a crisis might be less potent than historically, giving gold a greater relative advantage. - Against a backdrop of increasing geopolitical tensions, central banks' preference for gold also serves as a hedge against the risk of financial sanctions or asset freezes. This long-term trend, layered over the short-term alarm from the S&P-to-Gold ratio, suggests a broader reordering of the financial landscape driven by de-globalization and geopolitical fragmentation. To what extent does this "generational alarm," given its historical precedents, signal a fundamentally different market paradigm shift compared to past instances (1929, 1971, 2000)? While history often rhymes, the 2025 context possesses unique complexities that could lead to outcomes distinct from past reversals. - The reversals of 1929, 1971, and 2000 occurred under specific economic and geopolitical structures. Today, unprecedented global debt levels, heightened geopolitical fragmentation, and accelerating technological shifts like AI contribute to a more complex and uncertain environment than ever before. - The forecasted "deflationary bust" might be met with unprecedented government and central bank interventions, distinct from historical responses, aimed at preventing a full-blown economic collapse. These interventions (e.g., digital currencies, direct monetization) could distort traditional market responses, making asset performance predictions more challenging. - The increasing role of retail investors and algorithmic trading, compared to past eras, could amplify market volatility or accelerate trends but also introduce irrational factors at critical junctures, causing market behavior to deviate from historical patterns. While gold's long-term outperformance over equities may hold, the path to achieving that outperformance might be marked by unprecedented twists and turns.