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Is gold expensive?

September 18, 2009

Over at Jeff Watson’s excellent blog, he’s been debating whether gold is going up or going down. Rocky asks a slightly different question, “At $1,000 per ounce,  is gold expensive?”

The following graph shows the behavior of gold and the behavior of the US Consumer Price Index going back to 1947. While examining this chart, it’s  important to remember that:

1. It was illegal for US citizens (anywhere in the world) to own gold from 1933 until 1974. 

2. In 1944, the “Bretton Woods” agreement fixed the price of gold at $35 per ounce.

3. In 1971, President Nixon unilaterally took the USA off a gold standard, and from then to the present the value of gold (and the US Dollar) were allowed to float freely.

So, the question remains, is gold expensive at $1000 per ounce?  As those annoying math textbooks like to say, “the answer is left as an exercise for the reader.”

The black line is the CPI Index. The yellow line is the price of gold. Both values were normalized to make the visual relationship easier to see.

Gold Price versus US CPI Index

Gold Price versus US CPI Index

  1. Warren Murdoch
    September 18, 2009 at 2:55 pm

    Does your Bloomberg have a function to tell you if the time series are cointegrated?

  2. September 18, 2009 at 3:02 pm

    Warren: Can a horse fly?

  3. Warren Murdoch
    September 18, 2009 at 3:06 pm


  4. allocator
    September 18, 2009 at 7:10 pm

    Well it doesn’t seem like gold has spent all that much time above the CPI, and except for the late 70’s and 80’s, seems to have an aversion to crossing it. Gold seems to have played a lot of catch-up already. Reminds, I need to check my COT data …

    Commercials went another 13,864 contracts further net-short. Last week it was a huge 54,089. In two weeks open interest has gone from 384,703 to 467,892, 21.6%, and the price has gone up 5.5% in the same time frame. Have speculators suddenly run into an immovable object? …

    If the US dollar stops falling here, watch out if you’re long gold, especially gold stocks. (Just talking up my position – I’m mostly short gold stocks and silver bullion). 🙂

  5. September 19, 2009 at 1:51 pm

    Fakename thinks Rocky needs some comic relief here, which she is able to provide merely by commenting. She normally eschews subjects about which she knows nothing, and is often encouraged to eschew commenting in such circumstances, like when it concerns football. She can never keep running backs and receivers straight.
    Thankfully in this case Fakename has pictures to refer to (okay, technically graphs). Twice, recently. She likes the wiggly lines, but would like to offer the opinion that more color is needed. Perhaps the failing line could be pictured in red, wearing loafers from the new J.C. Penney store in Manhattan, whereas the superior line could be pictured in green Manolo Blahniks?

  6. September 20, 2009 at 12:32 pm

    Perhaps Rocky can find a similar chart for those investors, such as myself, who have Japanese-government issued Philippine pesos used during the WW2 occupation. I am hopeful these pesos have much value as a collectible. Think of the prestige of owning such rare currency. But if the value is underrated by the foolish market, I promise to keep a stiff upper lip.

  7. ld
    September 20, 2009 at 3:43 pm

    Rocky did not define a holding period in his question. If held “forever” gold at $1000 is not expensive. I am convinced that it will double and I am afraid it will triple in my lifetime. I don’t yet understand what socioeconomic change has caused its steep rise in the last 5 years.

  8. September 21, 2009 at 3:33 pm

    LD: It’s striking how certain asset classes go sideways for a generation; then play catch up; and then go wildly beyond what reasonable people consider “fair value.” Such is the nature of large cycle socioeconomic forces.

    Remember too, stocks went sideways from 1962 to 1982… and then … the largest bull market of the century.

    If this is a serious secular bull market for gold (and perhaps other non-paper assets), then this chart easily confirms your views.

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