Friday , 19 April 2024

Gold May Be Richly Valued: Caution is Warranted

So say edited excerpts from an article from as posted on under the title Gold May Be Richly Valued.

This article is presented compliments of (A site for sore eyes and inquisitive minds) and (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

The article goes on to say in further edited excerpts:

While gold is priced in US dollars, one way to attribute value to gold is by looking at its purchasing power. To do this, one must separate price from value. Gold may be rising or falling in price, but that doesn’t necessarily mean that its value is following suit. For example, if gold prices have risen but the amount of goods and services an ounce of gold buys has fallen, one might argue that gold has fallen in value.

By comparing the gold price against a sample of prices including:

  1. housing,
  2. medical,
  3. food and beverages,
  4. oil and
  5. the S&P 500

I was able to analyze the purchasing power of gold over time. Obviously, this is not an exhaustive comparison, but it does provide a perspective relative to several key goods and services.

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(Note that the data for all the charts below begins at a common inception in 1986 for comparison purposes. As my fellow analysts already know, conclusions are often start/end-date sensitive, but for the purpose of this comparison I felt the benefits of using a common start date outweighed the drawbacks.)

The following charts illustrate the point:

1. How Much Housing a Troy Ounce of Gold Can Buy

(click to enlarge)

The above chart shows how much housing an ounce of gold can buy. The ratio is based on housing inflation rather than the median home price, which is why housing has been unitized. (Same goes for other measures below.) This line has risen partly because housing prices have collapsed and partly because gold prices have risen. Nevertheless, the ratio appears to favor selling gold to buy real estate.

2. Cost of Medical Care In Ounces of Gold

(click to enlarge)

Anyone who has paid a hospital bill lately knows that medical costs have risen relentlessly. Despite this, gold has risen faster and looks overvalued relative to the cost of medical care.

3. Food & Beverage Units Per Ounce of Gold

(click to enlarge)

Food prices have also risen considerably over the past few years. Again, however, gold prices have risen faster. This chart is bearish for gold’s valuation.

4. Gold’s Performance Compared to the S&P 500

(click to enlarge)

When comparing gold against financial assets the story becomes a little less bearish. In comparison to financial assets (i.e. equities) gold has risen substantially since the early 2000s. Despite gold’s relative performance, based on this metric it is still below its 1988 high and may have room to advance further before one might consider gold overvalued relative to stocks.

5. Barrles of Oil Per Ounce of Gold

Perhaps the least bearish chart, the above illustration shows how many barrels of oil an ounce of gold will buy. While the amount has risen over the past few years, it is still far from the high of the late 1980s. Of course, one must consider the dynamics in the oil market when looking at the barrels per ounce metric. Oil price momentum over the past decade has been driven by a tightening global supply-demand environment and this has helped temper gold’s valuation rise relative to oil.


As an asset that doesn’t pay a cash flow, gold can be quite difficult to value. Gold’s value is derived in relation to other variables: money supply, prices of other goods and services, supply and demand. Clearly valuing gold is not an exact science, and this is why investors should consider both bullish and bearish arguments for the metal.

While I have covered the long-term bullish argument in the past, I believe there are some indications that gold is richly valued in the interim. Caution is warranted.

Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.



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