I have written a few pieces recently examining whether or not gold is in a bubble by looking at the gold price ratio relative to various assets. Seeing this, a reader requested that I look at home prices relative to gold prices.
Comparing housing to gold is an interesting exercise. Many view housing and gold in a similar light. Both are seen as hard assets providing an inflation hedge. On the other hand, real estate is a naturally leveraged asset and is more susceptible to speculative manias. Real estate also generates cash flows and provides daily utility to its residents. Real estate performance can also have a major impact on the broader economy, as we are currently witnessing.
The chart below shows that the nominal US home price index-to-gold ratio (blue line) has traveled far and wide since 1900. The ratio doesn't reflect how much house an ounce of gold can buy. It is simply an arbitrary number comparing the nominal housing price index (calculated by Robert Shiller) with gold. Note that a high ratio could indicate high home prices, low gold prices or some combination of both. For this reason, peaks don't necessarily occur at the end of housing booms and valleys don't necessarily occur at the end of housing busts. As with any ratio, there are two variables in this relationship. I have included the nominal gold price (orange bars) to provide some context around the ratio's level.
If one follows the peaks and valleys in the chart against the backdrop of the gold price, it is apparent that the ratio peaks near the beginning of gold bull markets and the valleys occur near the beginning of gold bear markets. Right now I can only observe the relationship and guess why this relationship exists. Perhaps an underlying economic current such as secular real economic growth drives housing prices higher and gold prices lower, as we saw in the 20 years starting around 1980. I challenge readers to explain why this phenomenon exists and if there's any reason for it to persist.
Today, the ratio rests near its historical low, possibly indicating a peak in the gold market. I certainly agree that housing prices in America are becoming attractive, but I'm not sure how much I agree that gold prices are due for a secular reversal, particularly as central banks around the world continue to print money. Perhaps the ratio will keep falling as the housing inventory glut drags on, or perhaps the ratio will rise solely due to house price appreciation.
However, if there's a compelling explanation as to why the ratio should rise at gold's expense, I'm open to ideas. Is it time to sell my gold and use the proceeds to buy a house?
[Click to enlarge]
Disclosure: I am long gold bullion.
