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In Real Terms, Gold Is Cheap—And Gold Stocks are Even Cheaper

by Lobo Tiggre
Monday, February 27, 12:00pm, UTC, 2023


A foundational fact in the gold space is that the gold-dollar exchange ratio has risen almost 44x since Tricky Dick Nixon removed any semblance of gold backing from the US dollar.

If that’s all this “pet rock” is good for, gimme more pet rocks!

There are, I understand, those who say that gold has risen too high. It’s too expensive. It’s overpriced and must correct.

In nominal terms, gold may look expensive—I did just say it’s up 44x since 1971—but that’s really just a measure of the value the US dollar has lost. In my view, the long-term gold-dollar exchange ratio is a real measure of inflation—not the phony CPI, PCE, and other measures governments report.

But if we look at monetary metals on an inflation-adjusted basis using government CPI data (a conservative, least-friendly-to-gold case), gold is still well below past peaks. Silver doesn’t look expensive at all.



Quick aside: the current relative high in gold looks quite different from the 2010-2012 high, which is reassuring.

And Darth Silver feels compelled to point out that the divergence in the chart above makes a case that silver’s “use case” is indeed changing. I won’t say that the gold-silver ratio will never go back to what it was (something I’m more willing to say about platinum), but I do think it’s dangerous to assume that it must and will.

If we look at gold and silver using John William’s ShadowStats inflation, they look cheaper than dirt. The difference is so huge, the regular CPI-adjusted lines look almost flat along the bottom of the chart.



I don’t often use ShadowStats data, as I think there’s a methodological issue with the way John calculates things. But still, if reality were halfway between what the BLS and John estimate, the picture would tell much the same story: gold is not overpriced.

If anything, the dollar is overvalued.

And if gold is cheap, gold stocks are even cheaper—priced in gold, which is the soundest way to price them.



Note that the GDXJ junior gold miners fund only goes back to 2009. Still, despite higher gold prices since then, gold stocks are clearly not getting anywhere near the premium they got during the 2011 spike.

Of course, what we really want to know as speculators is when gold will head decisively north again. I expect this to happen when expectations for inflation heading back down to 2% are dashed. When people in larger numbers start hedging against higher prices with liquid real assets, I think gold will top of the list.

I have no future-seeing crystal ball, but if this happens while the US and global economies are in recession—plunging everyone in the financial world into a 1970s-style stagflation nightmare—the upside should be breathtaking.

But even if that doesn’t happen and by base case is off, the fact remains that in real terms, gold is cheap.

As stackers saving for the long term, that’s all we really need to know.



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