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There is a substantial debate about what asset, if any, gold price relates to or
responds to….We think the most logical factor in its price as a form of money would be the ratio of the currency in circulation versus the amount of gold that could be associated with that currency…We have heard some strong opinions to the contrary…that perhaps some other assets other than currency in circulation could be used to explain gold price behavior, and therefore provide some gauge of over and under valuation in the market price. [We look at 14 different assets below.] Words: 586
So says Richard Shaw (http://qvmgroup.com) in edited excerpts from his article* entitled Gold’s Graphic Relationship To Other Major Assets
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), may have edited the article below to some degree for length and clarity – see Editor’s Note at the bottom of the page for details. This paragraph must be included in any article re-posting to avoid copyright infringement.
Our Preferred Gold Valuation Metric
We like the ratio of the currency in circulation in the United States and Europe to the gold held in their combined central banks. That number is around $4,000; and would grow as the issued paper money increases, assuming no increase in the gold held by the central banks.
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The $4,000 round number comes from summing the U.S. dollar equivalent of all Dollar and Euro currency in circulation ($2.64 Trillion) and dividing it by the sum of the gold held by the U.S. and European Monetary Union central banks (667.4 million ounces), which comes out to be $3,955 per ounce. In other words, if there were ever a return to full convertibility to gold, that is the price at which all currency if converted would cause the payout of all central bank gold holdings.
We don’t think convertibility will return, but so long as central banks continue to hold gold, they keep the concept of potential convertibility alive, and as long as a large number of gold buyers think gold is a “real money” alternative to fiat currency, this convertibility calculation has some bearing on the current investment value of gold at any time. [For example,] should…another major market problem like that in 2008 should arise, gold could drop as much as it did in 2008. That drop was 30%. If you take 30% off of the most recent high for gold, you get $1,300. That is plausible, not probable, and would likely be temporary, but it could happen.
Other Investments vs. Gold
You may… feel that other assets are better correlates or value drivers, so we put together this batch of charts that show gold versus various other investments on an indexed basis that may help you think through which, if any, you find to be a good yardstick to help you know when gold is priced too high or too low versus some sense of value.
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The data is either from the U.S. Federal Reserve or from StockCharts.com. Data is from 1969 for most of the Federal Reserve charts and for 20 years for most of the charts from StockCharts. In each case we present the data on an indexed basis so the relative change in each plot is more easily discernible. The comparisons may be interesting if nothing else.
Our Preferred Way: Gold vs. U.S. Currency In Circulation
1. Gold vs. M0 (currency), M1 And M2
2. Gold vs. U.S. Federal Debt
3. Gold vs. Combined Federal, State And Local Debt
4. Gold vs. Federal, State And Local Debt, Plus Household Debt
5. Gold vs. GDP
6. Gold vs. Cost Of Living (as measured by “all items” CPI)
7. Gold vs. U.S. Stocks (S&P 500)
8. Gold vs. West Texas Crude Oil
9. Gold vs. Copper
10. Gold vs. Silver
11. Gold vs. Corn And Soybeans
12. Gold vs. 10-Year Treasury Yield
13. Gold vs. Dow Jones AIG Commodity Index (includes gold)
Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
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