by Daniel R. Amerman, Gold Seek:
The Gold to Housing ratio is a quite useful measure for evaluating relative values between real estate and gold, and also has an interesting historical track record for identifying turning points in long-term gold price trends. In light of the surge in gold prices in 2016, and 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 Gold to Housing ratio is a measure of relative value between gold and real estate. It is the number of ounces of gold required to purchase an average single family home in the United States.
Now people often buy gold and real estate as alternative investments, either because they are seeking fundamental diversification from financial assets such as stocks and bonds, or they are concerned about inflation.
However, while real estate and gold are each tangible assets and can be powerful inflation hedges – they don’t tend to move together in real terms.
This 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 40+ years, but they so in quite different cycles, with their peaks and valleys occurring in different years.
When we take the $243,301 current median national price for an existing single family home and divide it by the $1,350 price per ounce of gold as of August 18, 2016, we come up with a Gold to Housing ratio of 180, meaning it takes 180 ounces of gold to purchase an average single family home (detailed methodology notes are available here).
Key Current Analysis Results
Below is a quick summary of 15 key points about the Gold to Housing ratio in 2016. I have been writing about these subjects for some years now, and for long-time readers I specifically point to the investment implications within that much larger body of work. The great majority of the information should still be clearly understandable for a first time or recent reader.
I have been writing about these subjects for some years now, and for long-time readers I specifically point to the investment implications within that body of work. The great majority of the information should still be clearly understandable for a first time or recent reader.
1) Gold and housing are each above their long term averages in inflation-adjusted terms, with gold being much higher relative to its average valuation than we see with housing.
2) Both gold and housing have risen sharply in price in 2016 – but the increase in gold prices is much greater, on a percentage basis.
3) Gold is not acting as a “stable store of value”, because that is a myth in modern times. Instead gold has been acting as something much rarer and more desirable – which is as a contra-cyclical crisis hedge. This can be clearly seen with the two spikes in value that correspond to crisis and perception of crisis, and led to gold valuations in inflation-adjusted terms that were more than four times as high as the lowest annual average. However, this can be problematic for buy and hold strategies at current price levels, when people think they are buying a stable store of value, particularly when inflation taxes are taken into account.
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