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Gold Reaching High Valuation Metrics

August 12, 2020 By Mircea Vasiu

Gold reached a new all-time high this year. While considering the current times of crisis, should not come as a big surprise. What is surprising is the way it did it – in a strong, vertical move, breaking all relationships known so far. 

It even triggered a sharper move in silver. The gold-silver ratio, for instance, used for investors as a proxy for the price of silver when compared with gold’s price, declined consistently.

In the last few days, gold lost about $200. Just like that, sellers appeared above the $2,000 mark. What is curious is that the move lower in gold correlated with a general risk-off reaction – the U.S. stocks declined, silver corrected as well, and even the USD rose across the board. Is it the beginning of a new trend? Or just a much-needed correction?

Gold Relatively Expensive to Housing

One of the most important sectors in an economy is the housing sector. Judging by how many ounces of gold are needed to buy the median-priced existing home, gold reached a level where it is relatively expensive.

Why is such a comparison important? To start with, so far, this crisis differs from the 2008-2009 Great Financial Crisis. For example, U.S. home prices are rising. Sure, the Fed throwing stimulus after stimulus at the market has a lot to do with it. But the fact remains that the sector is more resilient than in previous crises.

One could also make the point that property is very cheap when compared to real purchasing power, even adjusting for all the money printing.

It is not only the United States housing sector that remains resilient. The German one follows a similar path. Housing prices in Germany increased 6% in the second quarter when compared with the same period a year ago, with demand for family houses being especially strong.

Coming back to gold, for the ratio to remain valid, the rise in the price of gold should not exceed the rise in the housing prices. The higher the rise in the price of gold exceeds the rise in housing, the more stretched its valuation becomes.

Yesterday’s drop in the price of gold showed that gold has a life of its own. At one point in time, the drop in gold was accompanied by a higher EURUSD – a curious move as in general, there are no one-way trades.

However, towards the close of the day, the EURUSD dropped together with the stock market, making up for the gold’s decline.