I am not a bull or a bear. I am a data observer.
Among the millions of pieces of data in existence, I look at what I can and attempt to synthesize a thesis based on that information. One day I might look at one set of data and derive a bullish thesis on an asset. The next day I might look at another set of data and derive the opposite conclusion. I am not married to my ideas and neither should you be.
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 housing, medical, food and beverages, oil (DBO) and the S&P 500 (SPY) 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.
(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:
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.
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.
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.
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.
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.
Disclosure: I am long SGOL.
Additional disclosure: Data Source: St Louis Federal Reserve. This is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.