Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24
RECESSION When Yield Curve Uninverts - 8th Sep 24
Sentiment Speaks: Silver Is Set Up To Shine - 8th Sep 24
Precious Metals Shine in August: Gold and Silver Surge Ahead - 8th Sep 24
Gold’s Demand Comeback - 8th Sep 24
Gold’s Quick Reversal and Copper’s Major Indications - 8th Sep 24
GLOBAL WARMING Housing Market Consequences Right Now - 6th Sep 24
Crude Oil’s Sign for Gold Investors - 6th Sep 24
Stocks Face Uncertainty Following Sell-Off- 6th Sep 24
GOLD WILL CONTINUE TO OUTPERFORM MINING SHARES - 6th Sep 24
AI Stocks Portfolio and Bitcoin September 2024 - 3rd Sep 24
2024 = 1984 - AI Equals Loss of Agency - 30th Aug 24
UBI - Universal Billionaire Income - 30th Aug 24
US COUNTING DOWN TO CRISIS, CATASTROPHE AND COLLAPSE - 30th Aug 24
GBP/USD Uptrend: What’s Next for the Pair? - 30th Aug 24
The Post-2020 History of the 10-2 US Treasury Yield Curve - 30th Aug 24
Stocks Likely to Extend Consolidation: Topping Pattern Forming? - 30th Aug 24
Why Stock-Market Success Is Usually Only Temporary - 30th Aug 24
The Consequences of AI - 24th Aug 24
Can Greedy Politicians Really Stop Price Inflation With a "Price Gouging" Ban? - 24th Aug 24
Why Alien Intelligence Cannot Predict the Future - 23rd Aug 24
Stock Market Surefire Way to Go Broke - 23rd Aug 24
RIP Google Search - 23rd Aug 24
What happened to the Fed’s Gold? - 23rd Aug 24
US Dollar Reserves Have Dropped By 14 Percent Since 2002 - 23rd Aug 24
Will Electric Vehicles Be the Killer App for Silver? - 23rd Aug 24
EUR/USD Update: Strong Uptrend and Key Levels to Watch - 23rd Aug 24
Gold Mid-Tier Mining Stocks Fundamentals - 23rd Aug 24
My GCSE Exam Results Day Shock! 2024 - 23rd Aug 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Pricing the World in Gold

Commodities / Gold and Silver 2011 Feb 10, 2011 - 03:12 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleEquities, housing, commodities and bonds viewed through the prism of what money once was...

WHAT WOULD the world look like if, as a handful of economists, investors and politicians hope, gold really was money again?


In a word, cheap...ish. Cheaper, at least, than much of it was a decade ago.

Dow/Gold Ratio (monthly)

Long used (together with silver) as a means of exchange and unit of account, gold had already lost those functions by the time it ceased backing the world's currency system in 1971. But gold retains the third function of money - as a store of value - now beating, now lagging the unbacked fiat money (i.e. created at will) which replaced it.

Since then, gold's value has also varied more widely against other, competing stores of wealth as well as cash, amplifying the swings in its relative worth against equities, real estate, commodities and government bonds.

Perhaps you've seen the above chart before, for instance. Simply dividing the Dow Jones Industrial Average by the Dollar-price of gold per ounce, the Dow/Gold Ratio might sound an arbitrary yard stick. But it tracks the relative worth of US equities against an increasingly popular, if still minority store of wealth, gold bullion. Dividends are excluded, leaving just the market-price - rather than income or earnings potential - of business assets in the world's largest economy, measured by a lump of dumb metal.

Why? Because unlike corporate equity, gold doesn't do much. It can't even rust, much less grow (or shrink) its return-on-capital-employed. And from the recent low (7.2 ounces per Dow unit, hit in Feb.2009), US stocks have gained 20% vs. gold. (Priced in nominal dollars, they've risen 73% in the last two years.) The historic low stands beneath two ounces of gold, the all-time high above forty. Today, the Dow/Gold Ratio sits just shy of nine - a little beneath its 12-decade average of ten.

Note those two lows (or rather, peaks for gold ), hit in the mid-1930s and early '80s. Because they show up elsewhere, as well.

US Home Prices Measured in Gold Ounces

The average US home - a term so broad, it's quite possibly worthless beyond the very broadest historical sweep - has averaged 202 ounces of gold over the last 120 years, at least on the data we've constructed from a collection of sources to cover more than a century's worth of different housing, styles, sizes, locations and amenities.

Let's put the methodological doubts to one side, though. Currently priced around 112 ounces, US housing hasn't been this cheap in three decades, dropping over 75% from the 2001 high (478 ounces; the 1971 peak was 485 ounces). Returning to the very lowest prices on BullionVault's series would see residential property lose another third. It hit 77 ounces in 1980, just above the 1934 low of 71 ounces. Whatever the national US housing stock gained in utility or comfort over that time, in short, unrusting gold priced it just as lowly amid first a deflationary and then an inflationary depression.

Commodities Priced in Gold

Commodities are a separate matter. Because they have never been cheaper in terms of gold, slumping by more than 70% since 2001, even as the much-touted "commodity super-cycle" took energy, base metal and now food prices to record highs in terms of the Dollar.

Buying commodities in the hope of growing your capital means you're "selling human ingenuity" reckons SocGen strategist Dylan Grice, and (over the last 300-odd years) he's got a point. Because raw materials are "generally cheaper to produce over time [as] human innovation has lowered the cost of production." Yet ironically, Grice's point is best made in gold, that least ingenious, least human of all pricing yard sticks. Indeed, the difference between gold-priced commodities and gold-priced stocks or housing is that raw materials failed to surge and recover their previous highs after the 1970s' bear market. For the last six decades and more, gold has grown consistently more valuable in terms of the world economy's natural-resource inputs.

Our chart takes the Reuters-Jefferies CRB index - a weighted basket of the 19 most heavily traded raw materials, including aluminum, crude oil, live cattle, orange juice, and gold itself - and divides it by the Dollar-price of gold. As with housing and stocks, gold's most dramatic gains and highest valuations came during economic turmoil, outpacing the price of industrially useful natural resources even amid the severe cost-inflation of the 1970s as well as during the last four years of global financial crisis. Further back, once again, the Great Depression also saw gold's relative worth rise sharply against raw materials, as commodity prices sank but gold was revalued higher by governments, who - then tied to its physical limits as money - were desperate to devalue currency and so reduce debt burdens in a bid to reflate the economy.

Last in our little survey of gold's relative worth, therefore, come government bonds. There's a problem here, because governments are constantly paying old and raising new debt, issuing bonds with a vast range of maturity dates which (unless they default) all revert in the end to par value, redeeming $100 (or £100, €100 and so forth) for every $100 originally lent by investors.

A broad price basket is hard to construct, in other words, with the various indices - such as those offered by S&P and Dow Jones - also including annual yields to give "total returns", and only running back a few years at best.

Value of all the gold ever mined as % of AEGD

One solution is to weigh gold's total value against the sum total of debt outstanding - the par value of government bonds in issue. Data from the International Monetary Fund, running from 1980, at least enables us to cover the world's "advanced" economies. And here, based on what we may as well call the "market capitalization" of gold - and in contrast to stocks, housing and industrially useful resources - government debt looks very highly priced, albeit on a mere three-decade horizon.

All the gold above-ground - swelling to some 165,000 tonnes or more today, and including central-bank reserves and that mass of jewelry used to store wealth in Asia, as well as the coins and gold bars more typically favored by Western investors - has been swamped, in terms of relative value, by advanced-economy government debt. Back in 1980, their nominal cash values were pretty much identical. Yet the doubling of gold's Dollar-price from that year's (then) record high, plus the two-thirds increase in above-ground gold stockpiles over the last 30 years, has still left the metal worth less than one quarter of what it was at the start of the '80s in terms of rich-world government debt.

That debt, now 18 times larger in Dollar terms at $36 trillion, has swollen from 25% of those rich-world economies' GDP to more than 87% of their annual output. There's very much more of it around in 2011 than in 1980. On a relative basis - and given that the par value of debt outstanding cannot fall without default or "restructuring" - gold's steady appreciation against equities, US housing and raw materials has barely begun to play out against government bonds.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in