Whether Gold Is Worth Its Own Weight in Gold

Includes: ABX, AUY, EGO, GG
by: Bachar Samawi

After reaching a record price of $1,917.90 per ounce, gold prices dropped about 9.2% to around $1,740 today, this Thursday morning. Many are wondering whether such drop is a temporary drop before we move even higher to test the $2,000 per ounce level, or whether such drop is the beginning of the unraveling of gold's historic run.

In a recent article, it was reported that in affluent Westport, CT, at a local store, there was a line coming out of the door, with people looking to sell their gold. Given recent appreciation in prices, maybe they believe that gold is no longer worth its own weight in gold ... This does not necessarily mean that gold prices may not go even higher, but it may mean that relevant to the alternatives, everything else is starting to look cheap.

It is only about 3 years ago in 2008 that gold was trading around $900 per ounce. Since then, Gold prices have more than doubled. Meanwhile, according the Federal Finance Housing Agency, the U.S. Housing Price Index dropped over 14% from 211.8 in May 2008 to181.8 in May 2011. In other word, with the same amount of gold, you can buy around 2.4 houses for the same price you paid in gold to buy 1 house in 2008.

A look at auto prices provides a similar pattern. According to Truecar.com , the average price for a new car in the U.S. in 2008 was approximately $28,000 (it fluctuated around such price throughout the year) , while in July 2011 it registered about $29,761. Hence, with the same amount of gold, you can buy around 1.95 cars for the same price you paid in gold to buy 1 car in 2008.

At the end of the day, consumers are smart. The numbers look equally compelling for clothes, bikes, bread, airline tickets, computers, etc. ... When consumers realize how much their gold can buy them today, vs. how much it bought them a few years ago, it is not surprising that they are rushing to sell their gold, and who knows, possibly buy houses, computers, and cars?

What does this mean for Gold stocks such as Barrick Gold (NYSE:ABX), Yamana Gold (NYSE:AUY), Eldorado Gold (NYSE:EGO), & Goldcorp (NYSE:GG)? If physical demand for gold subsides, it is possible that the prices of such stocks could come under pressure. However, if the prices of other asset classes rise, and gold prices continue to rise but at a slower rate, then gold stocks could simply underperform.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.