The Gold To Housing Ratio As A Valuation Indicator

The Gold to Housing ratio is a quite useful measure for comparing the relative values of single family homes and gold, and it also has an interesting historical track record for identifying turning points in long-term gold price trends. After the pandemic-related economic events of 2020 and with the continuing strength in housing – it is worthwhile revisiting this basic measure, because the results aren't at all what most people likely think they are.

The average price for an ounce of gold in 2020 was $1,770, which set the all time record. The pandemic was clearly a good time to be a gold investor. However, there was more to it than just the pandemic, with gold climbing every year on an average annual basis since the trough of $1,160 in 2015.

Historical Home Prices

Homes were also shooting upwards in price at the same time, with the median U.S. home reaching a value of about $241,000 in 2020 on an annual average basis. This was up from a trough of about $144,000 in 2011, meaning that the average home gained almost $100,000, or 67% in nine years.

(The median home price is based upon the Federal Reserve's triennial 2019 Survey of Consumer Finances, which is usually considered a definitive source for U.S. consumer finances. It was adjusted for 2020 using the Freddie Mac House Price Index. More information can be found in the methodology notes linked here.)

Gold and real estate are two types of "hard assets" that are often bought as alternative investments, either because people are seeking fundamental diversification from financial assets such as stocks and bonds, or because they are concerned about inflation.

As the U.S. debt explodes upwards even while new stock price records are being set in the midst of unprecedented global economic devastation, with what is holding the markets and the nation together being effectively funded by monetary creation by the Federal Reserve - many people would argue that this is particularly good time to be invested in tangible assets that are inflation hedges.

However, while real estate and gold are each hard assets and can be powerful inflation hedges – they don't tend to move together in real terms. In this analysis we will examine the history of the two assets to get a measure of relative value, and find which asset currently looks cheaper than the other when compared to thelong term norms of their relationship.

This analysis is part of a series of related analyses, which support a book that is in the process of being written. Some key chapters from the book and an overview of the series are linked here.

The Gold To Housing Ratio

Gold & Housing Deviations From Average

The differences between the two hard assets can be clearly seen when we adjust historical prices for inflation, as shown above.Both investments do oscillate up and down around long term averages over the last almost half century, but they so in quite different cycles, with their peaks and valleys generally occurring in different years.

History shows that if you can buy gold "cheap" while real estate is relatively "expensive", then on an asset price basis gold is likely to strongly outperform real estate as an investment, all else being equal. 

Conversely, when real estate is "cheap" and gold is "expensive" relative to its long-term averages, then it is real estate that is likely to powerfully outperform gold as an investment over the long term.

But what exactly is "cheap" and what is "expensive"?Answering that question is where the Gold to Housing ratio is quite useful. As there is no dollar component in the ratio itself, the inflation index and measurement concerns drop out, and we are left with the value of two of the most popular hard asset investments relative to each other.

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Disclosure: This analysis contains the ideas and opinions of the author. It is a ...

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