Stocks Cheap to Gold Amid ‘Greater Fool’ Rally: Chart of the Day

Global equities are the cheapest on record relative to gold, bolstering the case for investors to buy stocks and sell the precious metal even as economic growth slows, according to Citigroup Inc.

The CHART OF THE DAY shows an ounce of gold buys about $115 of earnings from companies in the MSCI All-Country World Index, the most since Bloomberg and MSCI Inc. began compiling the data in 1996. The ratio hit the highest since at least 1970, according to Robert Buckland, an equity strategist at Citigroup who included a similar chart in a report dated yesterday.

Gold has surged 18 percent this year to $1,667.53 an ounce as investors sought a haven amid Europe’s debt crisis and a slowdown in the U.S. economy. The metal is the “ultimate greater fool” investment because it doesn’t produce cash flows and is only worth what someone else will pay, Buckland wrote. Measuring gold’s purchasing power relative to other assets including equities is one way to value the metal, according to the London-based strategist. The MSCI global stock index has retreated 10 percent from this year’s high on May 2.

“Equities look cheap compared to gold,” Buckland wrote.

While the metal’s rally may continue, investors who are bullish on gold should consider buying shares of mining companies, Buckland wrote. One ounce of the metal will buy about $80 of gold industry earnings, near the high of $88 reached in 1980, according to the strategist.

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net.

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Aug. 4 (Bloomberg) -- Chris Hyzy, chief investment officer of U.S. Trust Co., talks about his investment strategy. Hyzy speaks on Bloomberg Television's "InBusiness With Margaret Brennan" (Source: Bloomberg)