A look at the real value of gold on an historical basis.

I like making random gold ratio charts in stockcharts.com since it lets you chart the ratio of anything: gold:oil, gold:copper, gold:SPX, etc:

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If you do this kind of analysis on a longer-term basis, you see that gold is getting a bit expensive relative to other commodities, capital goods or labor (or you could say that each of those things is getting cheap when priced in gold). What is clear is that gold is no longer cheap by any measure. I don’t think this type of analysis has anything to do with where gold price goes in the near-term (technicals and sentiment drive that), but it’s helpful to think about where gold is on an historical basis.

  • The Gold:Oil and Gold:Copper ratios are moderately high, and would be off the charts if oil and copper were to crash.
  • Rent on a nicer 1BR apartment in Manhattan has fallen from 8 ounces in 2001 to 2 ounces today. This is about what it cost in the 1920s-60s.
  • 10 ounces in 2001 bought a 12-year-old Honda Civic, and now it gets you a brand new one with extras. A Model T Ford cost 15 ounces by the 1920s. The VW Beetle cost 30-50 ounces in the ’50s.
  • Median family income in was about 50 ounces in 1920, 90 ounces in 1955, over 100 in 1965, 70 in 1975, 75 in 1985, 95 in 1995 and way over 100 in 2000. Today, it’s about 30.

On a purchasing power basis, gold is adequately priced – it is certainly no longer cheap. Of course, markets don’t care about this on anything but the longest term – gold was overvalued at $500 in 1979, but it still spiked over $800 and then fell to a ridiculously low level in 2000. In the scenario where the dollar goes to zero, everything will soar in dollars, not just gold, so you’d still have to evaluate gold in terms of goods and services.

I’m still in the dollar bull camp for the foreseable future. Treasuries are pointing the way (record low 10-year yields, 3.5% on the 30-year, almost like Japan), and it looks like another bout of deflation is underway, if you define deflation as a contraction in money and credit (if credit is marked to market). Europe’s soveriegn debt implosion is deflationary. The same goes for the Australian real estate collapse and the pending RE collapses in China and Canada, and the US muni and junk market troubles.

I don’t see the dollar as any worse fundamentally than the euro or yen, and much better technically. Japan’s history since ’89 is proof that printing and spending and running up huge public debt doesn’t necessarily kill your currency. When there is too much private debt going bad but not being written off, it overwhelms the mismanagement of the currency and props it up. It doesn’t matter what you think of the fundamental value of the dollar if you’re in debt and can’t find enough dollars to make your payments. And until asset and labor prices and demand for goods and services can justify borrowing costs, there’s no credit expansion so no inflation.

Sentiment-wise, we’ve still got a great long-term case on the long-dollar trade. Fear of the dollar has been widespread since early 2008, but the DXY has just bounced around sideways – no crash. The crash happend from 2000-08, while nobody but old-school Austrians noticed.

Silver, platinum, palladium say gold needs to fall.

This spring, as gold topped out at over $1000 per ounce, platinum hit $2250, silver breached $20, and palladium reached $579. The ratios at the time were roughly 1:0.45, 1:50, and 1:1.75, respectively, about where they had been for the last several years.

Here are the five-year charts from Kitco, in order of descending pain:

I expected gold’s increase in relative value, since the other metals are considered more “risky” assets and depend more on industrial demand, but these ratios are looking a bit extreme. The one that jumps out at me is platinum priced only 10% higher than gold, at a level where gold was trading just two days ago!

With the deflationary carnage that has taken place in the rest of the precious metals (and base metals), gold’s grip on the $800 level is looking more and more tenuous. I have been figuring on $600 for some time, but now I am thinking that $400 is not out of the question. $400 sounds nuts, but there is a massive phase shift underway, in which cash is going from a hot potato to the one thing everyone needs but nobody seems to have.

That said, gold has been increasing in value against everything but dollars and yen, and to a lesser extent, euros, pounds, Swiss francs and some other currencies. It has been acting like a currency in this deflation, though one in need of a correction. In that regard, a fall to $400 would coincide with much more extreme dollar-denominated declines in almost all other assets.

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For more on this shift, see:

Bond sell-off just a correction. Bailouts will not stop deflation.

Don’t worry about the Fed printing… yet.