It's All Relative! A Look at the Price of Gold Relative to Other Assets

Those that have read some of my previous posts and comments here may recall that while always bullish on gold in the long-term, I've become concerned about the sharp rise in the price of gold relative to other assets. To quantify that thinking, I herein present my September Gold Chartbook.

This month’s gold chart book looks at the price of gold relative to other investible assets. For each asset, we use data going as far back in time as available. The assets compared include:
  • Crude Oil

  • S&P 500

  • Copper

  • Commodities, as represented by the Continuous Commodity Index

  • Corn

  • Residential Real Estate

  • Commercial Real Estate

The purpose is to determine how expensive gold may be relative to investment alternatives, which may help us consider whether gold is in a bubble or not and whether alternative assets may be more attractive than gold at this time from a valuation standpoint.

Our summary conclusions are below:
  • It is a remarkable period in the gold market whereby it has risen sharply in a recessionary environment that has led to muted increases or declines in most other assets. As a result, gold is trading at substantial premiums to historical ratios against all other assets and at or near peak levels relative to the CCI and residential real estate. Thus, on a relative basis, gold is most definitely not cheap.

  • We do not subscribe to the view that “it’s different this time”, that gold is a “must-own asset” or that a hyperinflationary collapse in the U.S. Dollar is imminent. There is always a point in any cycle where investors collectively rotate assets from what is expensive to what is cheap.

  • As such, the relative over valuation of gold will eventually be corrected in one of two ways: gold falls more than other assets or gold rises less than other assets. We’d argue the latter is more likely, so we are not calling for a decline in gold.

  • Residential housing is cheap. There is no question about it. Whether it has bottomed or gets even cheaper is up for argument. We’ll have more on that topic in future presentations.

The full presentation is below. Comments always appreciated.

DWS Gold Chartbook Sept 2011


Kid Dynamite said...


I'm confused by your conclusion "Residential housing is cheap."

I think you mean "Residential housing is cheap relative to gold." is that what you really mean? That's very different from the statement that you made.

Brian O'Flanagan said...

yes, in the context above I mean "residential housing is cheap relative to gold". I'd argue that residential housing is cheap on many other bases as well, but that's for another day.

GM Jenkins said...

Again, big thanks for sharing this proprietary stuff with us. One thought I immediately had was that most commodities on the CCI aren't stores of value, which maybe you could address. Whereas the gold:copper ratio (copper being a better store of value than say, corn) doesn't look significantly overbought at all (as does not the gold:silver; though admittedly that combination might beg the question, i think it counts for something combined with other data ). I'm not sufficiently aware of how the CCI components' price discovery works, but certainly the "flight to safety" driving the global physical demand for gold right now is different in quality than the demand for other commodities (where. e.g. demand destruction and substitution seem far more likely), right?.

I'd argue that residential housing is cheap on many other bases

Looking forward to that one.

OC15 said...

I think the title describes it all. When you say residential housing is cheap, it just all depends. To a the average person in Haiti, a $10,000 house in the U.S. would be way out of their price range. If we get to a point in this country where the "dollar is worthless", then housing is still very expensive. If it really were cheap the inventory would not continue to increase despite falling prices.

Brian O'Flanagan said...

I'd certainly agree that most of the commodities in the CCI aren't stores of value as well as gold is given the high cost of storage, transportation and spoilage. As such, those commodities are much more dependent on economic conditions and immediate supply/demand as they need to be consumed quickly. Thus, gold as a store of value is far superior to any other commodity and as a result one can make the case that that particular attribute of gold is a great value to investors today and therefore the higher relative price may be considered rational.

However, at a price those relative advantages may be fully priced in and I think rational gold investors should at least keep an eye on the price of investment alternatives. Furthermore, I think if investors are looking for an inflation hedge and are comfortable owning paper (futures contracts), other commodities seem much more attractive as it would be impossible to have inflation without these commodities (and housing) rising in price.

For those not familiar with the CCI, it is an equal weight index of 17 commodities futures contracts. By sector it is comprised of 18% energy, 18% grains, 12% livestock, 29% softs and 24% metals.

See link below for more:

Louis Cypher said...

Hi Brian,
Great stuff but I have a bone to pick with on housing and pricing. My measuring stick is the Boston area. Specifically housing around colleges as they will always be in demand. When I look at those houses they have typically dropped by 1/3 for multi family properties from their highs. Rents have been stable in these properties for about 10 years @ about $1800 per 3 bed, 1 bath units. In other words rental prices have been static for renters while the cost to buyers has been escalating until the crash. What this means of course it still doesn't make economic sense to buy one of these properties yet. Prices need to drop to at least 2000 AD valuations to make the numbers work. By work I mean monthly positive cash flow. On the professional landlord side (those that have multiple properties and use tax deductions as part of their cash flow calculations) the numbers still don't work yet. When we knock off another 1/3 those guys will start piling in. When we knock off another third off that we will have the amateur Landlord back.
So, yes, relative to Gold houses are historically cheap. Relative to rents though the prices are still too high and I am not touching real estate until I can make money from it.
My formula is simple.
Assume 9 months occupancy per unit.
Assume the full purchase price is financed.
Assume 1.5% above current rates as it is commercial.
Assume rents will not go up.
Assume $3000 per year in repairs, management fees where appropriate etc. per unit.
Assume your tenants are drug dealing scumbags who will probably trash your place.

Louis Cypher said...

Just as an FYI if Jim Sinclair's number is correct then we are talking about a handful of coins per house. Wouldn't that be something.$12,500_to_Balance_US_Debt.html

Brian O'Flanagan said...

LC: I'd agree that housing isn't cheap everywhere. It remains very expensive in many markets, particularly New England. If I were some day able to buy a median priced home here in Darien for 92 ounces, I would be ecstatic, but that will likely never happen. But in the housing bust markets in the sunbelt, the rental yield is much more attractive. I am aware of several entrepreneurs buying homes in bulk in those markets and getting very good returns, even unleveraged.

Louis Cypher said...

I have been mulling over the sunbelt area but my preference would be Key West. Key West seems to be holding it's own price wise and as far as I know you can't rent. I need to dig further into that though. Any other sunny waterfront areas you are aware of that is looking cheap?

Yukon Cornelius said...


Check out the 'Emerald Coast' in Florida. Lots of very interesting properties there at big discounts and worth a look in my opinion.

Louis Cypher said...

Thanks Yukon,
A quick look and property prices are 14k to 14M. Any particular areas look particularly good to you from a landlord perspective?

tyonk said...

May be that gold is still cheap compared to other financial assets? /thinking of the dow gold ratio.
I have been wrestling with this same argument since going to the "priced in gold" website. It opens your eyes a little and argues for the "fair value" side of things. Are we just playing for the bubble?
How do we compare to houses priced in 1999 nasdaq shares? The shills versus the topcallers and the truth is probably somewhere in the middle, but just where is that happy medium?