EC What’s Gold Really Worth?

What’s gold worth? Well, as of Friday morning, a LOT less than it was before. The Bank of Japan plunged a dagger into the bullion bull’s already-weakened heart when it announced a sweeping securities buying program.  Spot metal prices plunged as much a $40 an ounce, breaking through lows established at the end of 2012.

This should be no surprise to readers of this column. Last week, we noted signs of fatigue — slumps in share price momentum and vault holdings — in the SPDR Gold Shares Trust (NYSE Arca: GLD), bullion’s biggest exchange-traded proxy.

Technically, GLD seems poised to test the $100 level (the ETF was trading near $112 at press time). That’s an intermediate target which, if breached, could attract bargain hunters. The question for gold followers is “Is that really a bargain?”

Believers in mean reversion would probably say the bargains actually start below $66, the level at which GLD traded in mid-2007. Why? Because there’s a long-term relationship between the Consumer Price Index (CPI) and gold.

Over CPI’s history, gold’s traded at an average 3.2x multiple. In August 2007, for example, CPI was clocked at 207.90 when the London A.M. gold fix averaged $664. Bullion then was at equipoise (see the chart below). Gold, as many aficionados would tell you, had been undervalued up to that point (the more rabid would aver that the metal’s still too cheap).

Gold prices peaked at a 7.8x multiple in September 2011. Three years later, the gold/CPI ratio’s hovering just over 5. 

So, is it likely we’ll see another 40 percent sell-off in GLD — the decline needed to reach equipoise — now? Nope. Not this week, not this month, not this year. But there is more selling likely.

Remember, this relationship between CPI and gold is a long-term average, not a short-term, nor an intermediate-term indicator. It gives you a sense of the speculative froth (or gloom) roiling in the market.

DisclosureBrad Zigler pens's Alternative Insights newsletter. Formerly, he headed up marketing and research for the Pacific Exchange's (now NYSE Arca) ...

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John Fitch 5 years ago Member's comment


Do you believe in a negative correlation existing between gold and the strength of the dollar? It seems natural that as investors lose faith in the dollar, they move money into the seemingly more stable gold market, and vice versa. Since CPI is known to be a good economic indicator, could this be why gold and CPI seem to share a correlation as well?

Brad Zigler 5 years ago Author's comment

John -

Yes there is an indirect relationship between bullion prices and the US dollar. That shouldn't be surprising since gold is benchmarked in dollars.

I wouldn't characterize the gold market as being "more stable." There's in fact, a lot more volatility in metals than in currency.

As for the correlation of bullion and CPI, studies have shown that there isn't a statistically significant relationship between the two.

John Fitch 5 years ago Member's comment


Studies have shown that there isn't a statistically significant relationship between bullion and CPI? As per your article, "Why? Because there’s a long-term relationship between the Consumer Price Index (CPI) and gold."

Perhaps not strong enough to be statistically significant, but there is certainly a relationship. Although unpredictable in the short run, gold certainly can provide a hedge against inflation in the long run.

Brad Zigler 5 years ago Author's comment

John -

The "relationship" posited in the article is just that, a "relationship." It's a ratio, not a correlation. A correlation is a distinct statistical construct.

You may very well be right about gold as a hedge against inflation "in the long run." The question is: "What's a long run?" Years? Decades? Millennia?

The fact that an ounce of gold could buy a man's suiting now as in ancient Rome doesn't help someone planning for a nearby retirement.

Brad Zigler 5 years ago Author's comment

Kate -

The prices tracked in the article, to make them directly comparable to once-a-month CPI, are monthly averages.

GLD, in fact, is highly (>99%) correlated to bullion on a day-to-day basis. The only tracking error is due to the metal sales financing the trust's fees (0.40% per year). That said, the equally well-correlated iShares IAU gold ETF, with a lower (0.25%) expense ratio, should fare even better.

Kate Hayden 5 years ago Contributor's comment

So, gold is about double its 2008 price, but GLD is not. Are there any ETFs or other products that track the price of gold more closely?