Does Gold’s “purchasing-power-protection” Price History Suggest Gold is Over-priced?

[Serpo]

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Tuesday, June 5th, 2012 | Posted by Editor (http://www.munknee.com/author/lorimer/)
Does Gold’s “purchasing-power-protection” Price History Suggest Gold is Over-priced?

2 (http://www.munknee.com/2012/06/does-golds-purchasing-power-protection-price-history-suggest-gold-is-over-priced/#)
http://www.munknee.com/wp-content/uploads/2011/06/new.gif (http://www.munknee.com/wp-content/uploads/2011/06/new.gif)The spectacular rally in the gold price over recent years [has] manyhttp://www.munknee.com/wp-content/uploads/2011/11/Gold-Bullion-Ingots-150x150.jpg (http://www.munknee.com/wp-content/uploads/2011/11/Gold-Bullion-Ingots.jpg) observers asking if the precious metal has not moved ahead of its fundamentals…[and if it] has not entered speculative bubble territory. [To address that concern] I have calculated the purchasing-power-protection price of gold for the 43 years from 1970 to 2012 and compared it to the average market price for gold in every year [along with some background of events unfolding over each decade during that time period which should prove] useful as a framework for how to think about the [current] dollar-price of gold. [I think you will find it most enlightening. Take a look.] http://www.munknee.com/2012/06/does-golds-purchasing-power-protection-price-history-suggest-gold-is-over-priced/

[Golden]

Face value of coinage makes a bold statement.

[Sparky]

His numerical analysis that in 2012, gold's ratio of market price to purchase power price is the 3rd highest of the 40 years in the study. But his conclusion is that gold is not overpriced.

I agree that gold is not overpriced, but his numerical methodology doesn't back it up. So in making his conclusion, he ignores his own analysis.

Jeez.

[Serpo]

Yes a lot of years when gold didnt go up , but inflation was rampent

[Neuro]

The difficulty is too calculate the value of something that has held it's worth for 6000 years in a financial panic that risks making the financial promises worthless overnight. My guess is that Gold has a lot of gain in value left in terms of purchasing power over the next few years. But one cannot compare its value to non-panic times and say it is overvalued now...

[Awoke]

That article is just too long for me.

So then, can you buy something today with an ounce of gold, that you could have also bought 100 years ago with an ounce of gold?

[mamboni]

His numerical analysis that in 2012, gold's ratio of market price to purchase power price is the 3rd highest of the 40 years in the study. But his conclusion is that gold is not overpriced.

I agree that gold is not overpriced, but his numerical methodology doesn't back it up. So in making his conclusion, he ignores his own analysis.

Jeez.


Agreed. Now here's the rub. If gold is priced at 2.5 times it's inflation-adjusted 1935 price using the author's parameters, then how is it possible that gold and gold-related assets represent the lowest percentage (~1-2 %) of market capitalization in modern history. This is quite a contradiction. Typically, gold assets would represent ~10-20% of total market capital.

I know the reason for this. Do you?

[madfranks]

That article is just too long for me.

So then, can you buy something today with an ounce of gold, that you could have also bought 100 years ago with an ounce of gold?

Actually, you can buy more today with one ounce of gold, which is the reason the title suggests it's overpriced. But you have to take into account factors of production. It was more expensive to produce things, like clothing, furniture, gadgets, etc. 100 years ago than it is today. So one could argue that gold is more expensive, but you could also argue that everything else is less expensive.

[Golden]

Agreed. Now here's the rub. If gold is priced at 2.5 times it's inflation-adjusted 1935 price using the author's parameters, then how is it possible that gold and gold-related assets represent the lowest percentage (~1-2 %) of market capitalization in modern history. This is quite a contradiction. Typically, gold assets would represent ~10-20% of total market capital.

I know the reason for this. Do you?


I've only guesses. Please enlighten us.

[mamboni]

I've only guesses. Please enlighten us.

1. Paper asset prices are artificially inflated by leverage and derivative swaps, creating oversized notional prices that make gold assets proportionately smaller.
2. A higher proportion of world gold is held by private citizens outside of the banking and financial system and thus off the capital radar screen. Most of this gold is held in India, China, Russia and the eastern nations. US private gold is no doubt underreported. This is conjecture on my part.

For the record, gold actually does better in a deflationary environment than an inflationary one, purchasing power wise. This observation, coupled with it's long history as the highest quality and most secure asset par excellence is why owning gold here and now given the crumbling financial and monetary systems is such an easy and obvious call.

[Neuro]

Agreed. Now here's the rub. If gold is priced at 2.5 times it's inflation-adjusted 1935 price using the author's parameters, then how is it possible that gold and gold-related assets represent the lowest percentage (~1-2 %) of market capitalization in modern history. This is quite a contradiction. Typically, gold assets would represent ~10-20% of total market capital.

I know the reason for this. Do you?
Never before in history have we had this amount of financial products which have taken the brunt of monetary inflation, the Jews got richer...

[Sparky]

Agreed. Now here's the rub. If gold is priced at 2.5 times it's inflation-adjusted 1935 price using the author's parameters, then how is it possible that gold and gold-related assets represent the lowest percentage (~1-2 %) of market capitalization in modern history. This is quite a contradiction. Typically, gold assets would represent ~10-20% of total market capital.

I know the reason for this. Do you?

Well, one contributor is the the way "inflation" is handled quantitatively. He probably used CPI, which is an underestimate. Over several decades, this error compounds tremendously.

Were you thinking of something else?

[Golden]

1. Paper asset prices are artificially inflated by leverage and derivative swaps, creating oversized notional prices that make gold assets proportionately smaller.
2. A higher proportion of world gold is held by private citizens outside of the banking and financial system and thus off the capital radar screen. Most of this gold is held in India, China, Russia and the eastern nations. US private gold is no doubt underreported. This is conjecture on my part.

For the record, gold actually does better in a deflationary environment than an inflationary one, purchasing power wise. This observation, coupled with it's long history as the highest quality and most secure asset par excellence is why owning gold here and now given the crumbling financial and monetary systems is such an easy and obvious call.

Could I've said "Gresham's Law" and been correct?

[mamboni]

Well, one contributor is the the way "inflation" is handled quantitatively. He probably used CPI, which is an underestimate. Over several decades, this error compounds tremendously.

Were you thinking of something else?

I had the exact same thought, that the official CPI is biased low. This would have helped argument by producing a much lower PPP for gold. But, the fundamental reasons for gold being so underowned as a percentage of the total capital assets pie is explained in my prior post.

[mamboni]

Could I've said "Gresham's Law" and been correct?

Make things simpler, but not too simple. You'd have to apply Gresham's Law to the data on gold ownership and capital flows to get credit. Actually, Gresham's Law has been turned on it's head vis-a-vis gold. This is why the upward price move in gold is going to be so epic, as the system reverts to true north and corrects for decades of capital malinvestment and monetary debasement.

[JohnQPublic]

I like gasoline as an example. This uses silver rather than gold, but gets the idea across. One silver quarter currently trades for about 21x face (on a $1000 face basis, APMEX). This is $5.25 per silver quarter. Gasoline used to cost about 1 silver quarter per gallon. Now you can get about 1.2 gallons for the silver quarter, or silvers purchasing power in gasoline has increased 20%. Since the gold-silver ratio is high now this implies that gold's purchasing power has increased even more.

[Golden]

Make things simpler, but not too simple. You'd have to apply Gresham's Law to the data on gold ownership and capital flows to get credit. Actually, Gresham's Law has been turned on it's head vis-a-vis gold. This is why the upward price move in gold is going to be so epic, as the system reverts to true north and corrects for decades of capital malinvestment and monetary debasement.

Interesting. Couldn't the system stem this epic correction by slow QE in proportion to credit demand? Perhaps that is too far removed from reality and more aligned with the FED's mentality. So, more fitting would be giant corps suddenly going POOF! What I want to know is what events could cause such a massive correction in lieu of societal conditioning?

[mamboni]

I like gasoline as an example. This uses silver rather than gold, but gets the idea across. One silver quarter currently trades for about 21x face (on a $1000 face basis, APMEX). This is $5.25 per silver quarter. Gasoline used to cost about 1 silver quarter per gallon. Now you can get about 1.2 gallons for the silver quarter, or silvers purchasing power in gasoline has increased 20%. Since the gold-silver ratio is high now this implies that gold's purchasing power has increased even more.

Part of the premium on silver and gold may be due to physical scarcity. Ore grades for both metals have collapsed in the last 50 years. Gold production has plateaued and is slightly declining in absolute, and is definitely declining on a per capita basis and as a percentage of the gold basis. Historically, we added an average of 2% to the gold basis per annum over many centuries. We cannot maintain this rate of gold production today. This is compounded by the rising cost of production, reflecting deteriorating ore grades. The silver situation is similar to gold, only more acute.

[horseshoe3]

Actually, you can buy more today with one ounce of gold, which is the reason the title suggests it's overpriced. But you have to take into account factors of production. It was more expensive to produce things, like clothing, furniture, gadgets, etc. 100 years ago than it is today. So one could argue that gold is more expensive, but you could also argue that everything else is less expensive.

A few years ago, I was looking through my great grandfathers ledgers. He bought 40 acres in the teens for $25 per acre. That same ground is still in the family and would be worth around $2000 per acre now. This is the best example of an unchanged asset that is unaffected by technology or production advancements. It has mirrired the price of gold almost perfectly.

[gunDriller]

That article is just too long for me.

Long articles can get to me too !



Part of the premium on silver and gold may be due to physical scarcity. Ore grades for both metals have collapsed in the last 50 years.

No f'ing Kidding ! @ MiningFeeds.com they treat 3 grams per ton as a newsworthy ore resource. 100 years ago, you needed more like 3 ounces per ton to make a find interesting.

http://www.miningfeeds.com/

not knocking the website, it just makes the point about ore grades.

they might as well claim the Pacific Ocean as a mine resource. it's got millions of tons of gold - with a very high recovery cost.


PLUS ALSO - we're talking about the artificially depressed prices of Gold and Silver. the Cartel works very hard to keep their purchasing power down. it seems like they've worked harder than ever the last 6 months.

[Libertytree]

I like gasoline as an example. This uses silver rather than gold, but gets the idea across. One silver quarter currently trades for about 21x face (on a $1000 face basis, APMEX). This is $5.25 per silver quarter. Gasoline used to cost about 1 silver quarter per gallon. Now you can get about 1.2 gallons for the silver quarter, or silvers purchasing power in gasoline has increased 20%. Since the gold-silver ratio is high now this implies that gold's purchasing power has increased even more.

I really like this analogy JQP, thanks.

To me though, the question that is worth asking is....If the dollar collapsed tomorrow how much would any of the metals really be worth? Junk, SAE's, GAE's etc...

I know in the short term food is #1 and other commodities following. There are so many scenarios to try and 2cnd guess.

[Carl]

I really like this analogy JQP, thanks.

To me though, the question that is worth asking is....If the dollar collapsed tomorrow how much would any of the metals really be worth? Junk, SAE's, GAE's etc...

I know in the short term food is #1 and other commodities following. There are so many scenarios to try and 2cnd guess.

That's an easy one LT, silver will be worth whatever it can buy. Gold the same way.

[mamboni]

That's an easy one LT, silver will be worth whatever it can buy. Gold the same way.

Yep - that's the bottom line. It not the dollar price that matters, it's the purchasing power.

[Libertytree]

It seems then that gold and silver will always have an X value, while fiat will not, obviously. So, how much can information from the past help anyone to decipher its real worth in the future or even in the now?

It's a whole new world that awaits us and me thinks a silver dime will get a lot of mileage...yours may vary, but never to the negative.

[gunDriller]

I really like this analogy JQP, thanks.

To me though, the question that is worth asking is....If the dollar collapsed tomorrow how much would any of the metals really be worth? Junk, SAE's, GAE's etc...


i feel like the dollar collapsed today and it will continue collapsing tomorrow, as well as collapsing yesterday.

but since we are living in the middle of it, it doesn't seem as fast as the term "collapse" would indicate.

[Libertytree]

i feel like the dollar collapsed today and it will continue collapsing tomorrow, as well as collapsing yesterday.

but since we are living in the middle of it, it doesn't seem as fast as the term "collapse" would indicate.

But surely there's a day/week of reckoning?

[gunDriller]

But surely there's a day/week of reckoning?

i don't know. there's 2 ways to look at it -

* people catch on to gold & silver like they did in March/April 2011 and July/August 2011.

* we wake up and the headline reads something like, "Saudi Arabia declare dollar worthless, demands gold for oil".


i think we'll keep having the Chinese water torture version of devaluation, where you go the store one day and the loaf of bread is 20 ounces instead of 24, then a month later you notice coffee is being sold in these "cute little" 11 ounce packages, then a pack of gum breaks the $2 barrier, etc.

the "miracle of compounding" sword cuts both ways though. guess we'll find out next year when the next round of food price rises hit. just thinking about it makes me want to plant more carrots this year, because i don't want to pay more than 60 cents a pound for carrots next year !


of course, we lived through something similar in the late '70's, after Nixon went off the gold standard in, what was it, 1971 ?

but i was just a teenager learning to smoke pot, perform pelvic exams, & applying to colleges. i actually didn't notice any wierd dollar devaluation, at the store, and i didn't really catch the gold/ silver enthusiasm of the late '70's.

[Sparky]

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