Click to enlarge:

Source: Bloomberg

Is Gold cheap? Pricey? Somewhere in between?

I have a hard time answering that question because I have no frame of reference. With equities, I could look at earnings and/or dividends, sales, book value, etc. to determine relative valuation. With bonds, interest rate, credit rating (and whether its callable) give me some insight into the value.

I have none of that with gold. (Note valuation doesn’t tell me whether to buy it or not, only whether its cheap or dear).

Bloomberg’s David Wilson looks at another standard to value gold: The historical standards for the world’s two largest buyers, China and India. Today, the price of gold for immediate delivery has risen to records in the Chinese renminbi and Indian rupee after accounting for each country’s inflation. (The caveat is gold is priced in dollars).

Wilson references a recent study by Claude B. Erb and Campbell R. Harvey of Gold Prices and valuation:

“Gold objects have existed for thousands of years but gold has only been an actively traded object since 1975. Gold has often been described as an inflation hedge. If gold is an inflation hedge then on average its real return should be zero. Yet over 1, 5, 10, 15 and 20 year investment horizons the variation in the nominal and real returns of gold has not been driven by realized inflation.

The real price of gold is currently high compared to history. In the past, when the real price of gold was above average, subsequent real gold returns have been below average. As a result investors in gold face a daunting dilemma: 1) seek inflation protection by paying a high real gold price that almost guarantees a decline in future purchasing power or 2) avoid gold and run the risk of a decline in future purchasing power if inflation surges.”

Fascinating stuff . . .


by David Wilson
September 20, 2012

The Golden Dilemma
Claude B. Erb, Campbell R. Harvey
Duke University Fuqua School of Business/National Bureau of Economic Research (NBER) Revised August 3, 2012

Category: Gold & Precious Metals, Inflation, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

32 Responses to “Is Gold Cheap or Expensive? Look to China & India”

  1. algernon32 says:

    This guy tries to buy a taco with a gold eagle at the $50 face value. No one would take it.
    (Insert joke about not being able to eat gold here…)

  2. [...] Is gold cheap or expensive?  (Big Picture) [...]

  3. Petey Wheatstraw says:

    “Gold has often been described as an inflation hedge.”

    Gold has often been ERRONEOUSLY described as an inflation hedge. Primarily by nitwits.

    Purchasing power fluctuations or not, I don’t see central banks holding fire sales of gold (in exchange for what? Fiat currency? Stocks? Casino chips?). When the Fed/Treasury or other central bank starts leaving their gold holdings out back by the dumpster, other holders of gold will be well and royally screwed. Until then, I‘ll hang with the criminals.

  4. 10x25mm says:

    The gold price reflects expectations of inflation, not inflation itself. It correlates nicely with dI/dt, the first derivative of inflation with respect to time.

  5. Petey Wheatstraw says:

    And this:

    “Gold objects have existed for thousands of years but gold has only been an actively traded object since 1975.”

    That is an asinine comment.

    I guess the gifts of the Magi, the Gold Rush, soldiers stealing the gold fillings of the dead, gold coinage going back to the Greeks simply don’t count.

    Then again, maybe gold wasn’t traded in the US for a few decades because owning this worthless relic was ILLEGAL.

  6. Orange14 says:

    Warren Buffet’s letter to shareholders this year has the best explanation about why gold is a foolish investment. See page 18-19 here:

  7. dougc says:

    Couldn’t buy a taco with a gold coin is funny. In 1930′s Germany you couldn’t but a bagel with a wheelbarow full of german marksthat was tragic. Making financial decisicions based on anecdotal evidence is risky.

  8. metroplexual says:

    Other than the blip in the 70′s I recall the rule of thumb was that the cost of a tailored suit = 1 ounce troy gold. By that criteria gold is in the stratosphere. That said I read a few weeks ago that India and China need reserves to be built up which sounded plausible to me. BTW the same equivalency was supposed to be between a subway ride in NYC and a slice of pizza in NYC.

  9. streeteye says:

    Buffett’s point is well taken, but the fact remains that when fear is high, the yellow cube goes up in value and the productive assets go down.

    Mere mortals will find a partial hedge a comfort and it will make them less inclined to panic and sell the productive assets at a bottom.

    If you are incapable of fear and can buy productive assets at the right time, and in the face of a crash in the market value you can take the view that you had a productive farm or factory before and still have it, you will indeed probably do better with the productive assets in the long run.

  10. pacificbeach says:

    The single best quality of gold is that it’s not titled in your name. Many people are just one emergency room visit away from having to declare bankruptcy – in which case your car, checking account, and house are potentially gone. Gold is something that cannot be taken by a court of law and provides you with a permanent, if somewhat volatile, store of wealth.

  11. JJ Butler says:

    Real interest rates are the key to gold. In a world with ever increasing negative real rates…

  12. mns3dhm says:

    “The real price of gold is currently high compared to history.”

    Assuming that’s true, it may be the price of gold reflects the level of anxiety regarding holding other types of financial assets.

  13. gordo365 says:

    Gold keeps going up. The conditions that cause gold to go up haven’t changed (net – dysfunctional gov). Why go deeper than that on reasoning? If something works – ie investing in gold etc. – keep doing it until it doesn’t work anymore.

  14. metroplexual says:

    I still think it is the asian market looking to hedge what may be a wobbly economy over there. Remember in China they have a substantial local debt which everyone knows about. It is their anxiety driving this commodity up.

  15. nofoulsontheplayground says:

    Gold isn’t as much of an inflation hedge as it is a hedge against the loss of confidence in a particular currency.

  16. Moss says:

    Since no one wants a strong currency Gold will hold its own.

  17. Roanman says:

    I’m with Petey Wheatstraw, that was a pretty asinine comment, although I would probably gone with dumbass.

  18. Bam_Man says:

    There are negative (and in many cases SEVERELY negative) real interest rates all across the globe and this nitwit is using historical data to tell us Gold is over-priced. Over-priced compared to what? A 10-year US Treasury Note priced to yield 1.62% isn’t over-priced? AMZN at a P/E of 319 isn’t over-priced?

  19. camharvey says:

    On the asinine/dumbass comment (you are referring to me!). We were simply talking about the advent of futures trading on gold in January 1975. Owning bullion was outlawed by Roosevelt’s Executive Order 6102 in 1933. After Nixon took the U.S. off the gold standard in August1971, real trading started. Before that, from 1919 was the era of the “gold fixing” where five bullion dealers in London collectively decided the price for the day. The fix was suspended in 1939 but reinstated in 1954. So, we are really talking about more than a few decades. Nevertheless, the point is well taken about using longer history — and we do in the paper. We have a great example of wages of Roman soldiers compared to modern U.S. soldiers. We have a much longer history for the U.S. all is in our paper at Also, to respond to another comment above. Gold is not a good hedge for the unexpected or expected inflation. Again, analysis in the paper.

    BR: I do believe it was overturned permanently in 1964 . . .

  20. From a “fundamental” angle, I feel any investor really interested in gold should pay a visit to Fofoa’s blog. IMHO it provides very useful insights and has nothing to do with the typical “gold bug”, even though, curiously, if his thesis is proven right, then we will se 5 digits gold. Little by little Fofoa is becoming “mainstream” (which is not necessarily a positive)

    Technically, as per Dow Theory, the gold and silver and silver markets are in a primary bull market. Primary bull markets signals don’t happen very often, as a primary bull market means a powerful move. It is not uncommon to see price gains exceeding 40% in the first year. We aren’t talking of a “tradable” three months rally. We’re talking of something big.

    So technically, and in spite of the price of gold in ruppias, the odds favor a massive upside.

    Here you can find more details as to the bull market in gold and what it means


  21. Les Lofton says:

    I don’t understand the lower chart in dollars. Gold peaked about January 1980 at about $850 when the BLS CPI index was 77.8. Since the BLS CPI index is now 230.38, the price of gold would have to be about $2500 to match the 1980 peak on an inflation-adjusted basis.

  22. Les Lofton says:

    My old eyes finally made out the fine print at the bottom of the chart. It looks like they used a monthly price for the chart instead of a daily chart. The $800+ price in 1980 only lasted a day or two.

  23. techy says:

    Gold has gone up since 2001 mostly due to economic growth in india and china.
    I know personally the habit of Indians, they dont spend on consumption but mostly for real estate and gold and some silver. Its a must to gift huge amount of gold during marriage to girls. They also never sell unless in financial crisis.

    And they will always buy no matter what the price is. So till they have enough buying power expect gold to keep going up but if india/china gets into trouble expect gold to go back to $200.

  24. LiberTea says:

    The price of gold has gone up.
    And gold itself has not changed or produced anything.
    the value of money has gone down
    in the eyes of the purchasers,
    whether their motives are fear or distrust of governments and their ‘let there be’ currencies.

  25. boveri says:

    I have an only too too obvious frame of reference for Mr. Wilson. What does it cost to mine the stuff per ounce.

  26. Mr.-Vix-It says:

    According to this chart which is in 1998 dollars prior to the current secular bull market in Gold, we are about in the middle historically. When Columbus discovered the West Indies in 1492, gold reached its peak value at $2400 in 1998 dollars. In 2012 dollars, this is close to $3400. Since, we are at just under $1800 there is a ways to go before we hit truly historic highs.

    Here is a chart of silver also in 1998 dollars but it is more current as it includes the recent spike to near $50. The all-time high was in 1477 at $806 in 1998 dollars which equates to $1,139 in 2012 dollars. So, clearly silver can move more than 30x its current value and still not be at historic highs. If gold moves 2x, it will be at historic highs. So the black swan is silver if it ever gets considered as part of the alternative currency dynamic of gold. Of course, a historic gold to silver ratio of 15:1 would mean gold over 15k if silver went to 1k. That is about 8 to 9x for gold and 30x returns for silver. These would be true bubble endings for these metals.

  27. rd says:


    Another equivalency is that an ounce of gold has purchased a good quality, standard handgun for the past couple of centuries such as the Colt Peacemaker in the late 1800s. A Glock is about $600 today, so gold would be over-priced by that standard.

    Ultimately, gold is one of the ultimate hedges against collapse of a social or financial system, but only if you have it in hard form stored somewhere safe where you can get to it and be able to transport it without having it confiscated. The paper versions are just another fiat currency that are useful trading vehicles.

  28. Sri says:

    Cheap or expensive I have to buy Gold as it is an integral part of our culture and I have to pass it on to my children. The common man in India invests mainly in real estate, Gold and deposits. The proportion of investment in real estate is greater than investments in Gold jewellery. Speculative investments in precious metals are confined to a minority of the population. I agree the inflation rates in India are far higher than the rise in gold prices. But the common man has hardly any other choice. Investing in the stock market has hardly caught on in the rural areas. So people stick to what they know. Stupid policies of our Government and large scale corruption which has reduced demand for the Indian rupee and increased interest rates for international borrowings. The rupee has plummeted but Gold has certainly kept its purchasing power.

    I for one am really happy for the mainstream media in the West and people like Barry Ritholtz, Warren Buffet thrash Gold for it keeps a lid on those Gold prices so that I can buy more. Warren Buffet must remember that we the common man cannot influence Government policy like him to make his investments much more valuable. We are at the mercy of people like him. So Gold seems a better bet any day.

  29. gkm says:

    The “madness” of the crowd is certainly on display here.

    That notwithstanding, gold peaked in 1981 at about 850 say and currently is at 1775 – a doubling. Corn peaked at 4 per bushel and is near 8 – also a doubling. The utility of corn hasn’t changed and the value over time has changed in proportion to the change in the value of gold. Therefore, the value of gold, as can be exchanged for a commensurate quantity of corn is right where it has been historically in the last 40 years. Silver on the other hand is undervalued.

    Possibly the greatest asset the US as ever had has been the dollar. If that should be lost, I think the consequences are more profound than Buffett is appreciating.

  30. philipat says:

    Gold is money. Of the stable variety because Central Planners can;t print it.

  31. [...] Housing and labor are a lot more important to most people than the price of gold.) Barry Ritholtz takes a different look at whether gold is cheap or expensive. He includes this great [...]

  32. metroplexual says:


    The way I see it the gun has more value as does a suit unless the whole economic system falls apart then gold has no real value either because you can’t eat it or wear it.