The case is often made that Gold is an inflation hedge. However the volatile and cyclical nature of the metal shows that it doesn't practically work as such unless measuring over a long time frame.
For example suppose an individual had purchased some Gold in January 1980 right at the peak for US$850... did Gold keep up with inflation if this individual needed to sell some in 2001 at Gold's low point (US$250)? Of course not, in fact Gold hasn't even yet reached the inflation adjusted high after rising more than 600% from the lows (inflation adjusted high from 1980 is over US$2000). Gold is not practical as an inflation hedge over short time frames. However over long periods of time Gold does hold value in comparison to fiat currencies which continuously deflate in value as the supply is increased at unhealthily high rates.
There are examples from other commentators and authors showing that Gold has retained similar value over very long time frames (hundreds and even thousands of years) against livestock and against objects such as a fine suit. However the problem with this is you are taking two specific points in time to reach a conclusion that may differ if you varied the time frame selected by as little as a decade.
The reality is that Gold cycles in value against assets from overvalued to undervalued and back again (some would argue that it's other assets which cycle against Gold). Some of these cycles might be short term (such as the Gold/Oil ratio which I covered here) or medium term (such as the Australian property priced in Gold ounces, covered here). There are other (non-tangible) things that Gold cycles in value against as well. One of the most interesting I have covered on the blog before was an average Australian wage (see previous post here).
You can see the previous post for the data sources I have used (have spliced RBA/ABS data for wages). For wages I have taken the printed number from the last quarter in each year (as it's not volatile and generally is consistently rising), for Gold I have averaged monthly prices (AUD price) across the year due to price volatility.
Here is the average weekly wage of an adult Australian plotted against the annual (average) price of Gold in Australian Dollars since 1972:
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As you can see on the above chart, the spot price of Gold in Australian Dollars has surpassed the weekly Australian wage for the first time since 1989.
Chart in log form (requested by obakesan):
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| Click Chart To Enlarge |
And if we divide the price of Gold into the weekly wage we are presented with this ratio which shows Gold cycling in value against Australian wages (Gold undervalued as the ratio peaks and overvalued in the troughs):
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| Click Chart To Enlarge |
As I pointed out the last time I calculated this ratio, the weekly wage has cycled between around 1/2 and 2 ounces of Gold for the best part of the last 100 years.
1901:
Based on the above figures from the ABS the Wage/Ounce ratio was around .51 ($4.35 wage / $8.50 oz) in 1901. Source
1920:
In 1920 the Pound was valued at USD$3.66, so in USD an Australian weekly wage was around $38.43 and bought 1.86 ounces of Gold. Source
If we took the peak monthly price (instead of averaging over the year) the ratio actually dropped to around .37 in January 1980 rather than the .42 by averaging the Gold price over the year. To get back to these ratio levels we would need to see Gold climb to AUD$3750 or AUD$3300 respectively, assuming the average weekly wage remained at $1391 where it is today. In my opinion either of these ratios is possible (I would suggest likely) within the next few years as Gold shoots to overvalued status against Australian wages.
Despite that I blog on a site which might suggest I am a permabull on precious metals, that is certainly not the case and when I believe that the metals have reached a cyclical high against other assets (and other indicators such over valuation against wages) I will be looking to move a majority of my positions from Gold and Silver related assets into income producing/productive assets.
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BB.
