- Gold sits just shy of all-time highs near $4,200 an ounce
- Gold bugs will continue warn of the dangers posed by inflation and galloping debt, let alone geopolitical risk
- Investors with hefty exposure may be wondering about whether to rebalance
- Other commodities, notably oil, silver, platinum and copper, all look cheap relative to gold on the basis of historic price relationships
- Gold still sits short of prior relative peaks compared to US household income and the median US house price
“Gold bugs will be beside themselves after the precious metal’s’ 60% gain in dollar terms this year alone, but the more investors who buy in, the more of a consensus position it becomes, and the more of a consensus position it becomes, the fewer incremental buyers there are to drive up the price,” says AJ Bell investment director Russ Mould.
“True believers will continue to warn of the dangers of debt, inflation and geopolitics. Others may at least think about a portfolio rebalancing to ensure they do not become over exposed to an asset that is devilishly difficult to value.
Source: LSEG Refinitiv data
“The issue, then, is how to assess ‘fair value’ for the commodity, and whether there may be a level at which point it is sensible to lock in a profit.
“The all-in-sustained cost (AISC) of production can perhaps help to gauge what the downside may be. This is around $1,400 to $1,500 an ounce for major producers such as Newmont or Barrick Mining. But that does not help to judge any possible upside.
“Moreover, gold is inert, so there are no earnings, and it generates no cash, so there is no yield. Those issues support Warren Buffett’s view that the precious metal has no role in portfolios, but gold has been money since time immemorial, and the latest rounds of central bank stockpiling implies this latter view still holds currency at the highest level.
“One option, therefore, may be to assess gold in relative terms to other raw materials, especially as the CRB Commodities index stands close to its highest mark since spring 2011. This suggests that the price of other ‘hard assets’ is starting to motor and looking at how much utility gold can buy may be one yardstick to see whether the precious metal is still cheap or not.
“Whether we like it or not, the world still relies heavily on hydrocarbons as a fuel source, given annual consumption of more than 100 million barrels a day.
“In contrast to that of gold, the price of crude oil is currently going nowhere fast, with the result that the black stuff looks cheap relative to the yellow metal. Since 1970, one ounce of gold has on average bought 17 to 18 barrels of oil. It currently buys 69 barrels. The question now is whether the ‘barbarous relic’ of gold really has that much more value relative to Brent crude, even if the world is trying to transition to other, more renewable and sustainable sources of energy over the long term.
Source: LSEG Refinitiv data
“Since 1976, an ounce of gold has on average bought an ounce of platinum. It currently buys just over 2.6 ounces, even after a pullback from a peak of nearly 3.5 ounces seen this April. Since that point, gold is up by 31% but platinum is 75% higher.
Source: LSEG Refinitiv data
“Since 1970, one ounce of gold has on average bought 60 ounces of silver. It currently buys nearly 78 ounces, and even that is down from around 100 in the spring.
Source: LSEG Refinitiv data
“Since 1970, one tonne of gold has on average bought nearly 5,750 tonnes of copper. It currently just under 12,900 tonnes.
Source: LSEG Refinitiv data
“These historic, price-relative trading ranges offer no guarantees for the future at all. But those investors who fear inflation may like to maintain a bias to raw materials, relative to ‘paper’ ones like cash and bonds, and diversify their exposure to ‘real’ assets beyond gold.
“Those portfolio builders who fear a slowdown, recession or even debt deflation may take the entirely opposite view, especially since two other, real-world measures of gold’s affordability suggest it could still offer further upside.
“One crude way to assess ‘fair value’ for gold may be to measure how much metal a household can buy if it maxes out its earnings. If bullion moves beyond the reach of the average worker, or, dare one say it, private investor, that could at least crimp one source of incremental buying.
“Before US President Richard Nixon took America off the Gold Standard and smashed up the Bretton Woods monetary system in August 1971, an ounce of gold represented barely 1% of the average US household’s annual disposable income. That figure peaked above 9% in late 1980 at the end of the great 1970s bull market in gold. In this context, the current percentage of nearly 7% suggests gold could yet go higher, especially if inflation starts to pick up and drag earnings with it, either by means of pay increases or asset price gains.
Source: Jefferies, FRED - St. Louis Federal Reserve, LSEG Refinitiv data
“A different measure of gold’s value, especially relative to more worldly assets, is how many ounces of the metal are needed to buy a house. This captures the potential impact of inflation upon asset valuations, too.
“Again, before Nixon withdrew America and the dollar from the Gold Standard in 1971, a US householder needed 628 ounces of gold in their safe to fund the purchase of the median American house.
“That figure collapsed to just 78 ounces at gold’s peak in 1980 and then surged back to 625 ounces in 2001, as gold fell totally out of favour. The figure now is 97 ounces, to perhaps suggest gold has a little more juice in it yet on a relative basis, and more in absolute terms if the Federal Reserve lets monetary policy run too fast and too loose, with the result that asset prices continue to surge across the board.”
Source: LSEG Refinitiv data
