Tuesday, 27 April 2010

Gold Priced in British Pounds (GBP) – April 2010 Update

In absolute terms gold continues to climb in value reaching a new high today of £745.44 (when compared with the monthly historic dataset) since gold started its upward climb in 2005. In the last month gold is up £5.83 ounce however in real (inflation adjusted) terms as shown in today’s chart gold is actually going nowhere rising by only £0.77 per ounce.

This isn’t a problem for me as gold is now starting to do one of the many things that made me choose it as an asset class for my retirement investing low charge portfolio. It can be considered a store of wealth and cannot be printed or inflated away. The only inflation possible is by the increase in new gold mined every year and thats a relatively small amount compared with adding zero’s to a computer (quantitative easing, QE). Of course the other reason I hold gold is its relatively low (when compared to other asset classes) correlation with equities.

Gold however is yet to reach new real highs and since 1979 we have seen two month average higher real peaks. The first was £858.02 in 1983 and the second was £1,064.65 back in 1980. These peaks are still 15% and 43% higher respectively than today’s price suggesting that there is still plenty of potential upside.

On the other hand the trend line of the chart suggest gold today at only £259.86 and the historical average real gold price from 1979 is £439.83. So by both these measures gold looks over priced in GBP terms.

My second chart today shows the price of gold in GBP divided by the average earnings index for the whole UK economy (LNMM) since 1990. This ratio shows that gold was ‘cheap’ between 1998 and 2005 (remember Gordon Brown sold 400 tons of the UK’s gold reserves between 1999 and 2002 in a series of auctions). In earnings terms gold is today around 2.5 times more expensive than that period and rising.

As always DYOR.

Assumptions include:
- Last gold price actual taken midsession on the 26 April 2010
- All other prices are month averages.
- April 2010 inflation is extrapolated from the retail prices index (RPI).
- March and April 2010 average earnings (LNMM) is extrapolated.

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