Saturday 29 May 2010

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

In absolute terms gold continues to climb in value reaching a new high of £839.93 (when compared with my monthly historic dataset which goes back to 1979) since gold started its upward climb in 2005. In the last month gold is up £90.32 an ounce however in real (inflation adjusted) terms as shown in today’s chart gold it is up ‘only’ £83.32 per ounce. In real terms that’s an increase of 11%.

This big increase coupled with recent stock market falls means that the gold allocation in my low charge retirement investing portfolio is now sitting at 5.6% against a target of 5%. At the time of my last portfolio update less than 1 month ago I only held 4.2%. Of course this month I also added 0.8% to my gold holdings through a buy. Even so that is a pretty impressive move. At that rate it won’t be long before I will be seriously considering rebalancing by selling some of my gold.

Gold however is yet to reach new real highs and since 1979 we have seen two month average higher real (inflation adjusted) peaks. The first was £868.20 in 1983 and the second was £1,077.28 back in 1980. These peaks are still 3% and 28% higher respectively than today’s price suggesting that we are close to 1983 but still a long way from 1980.

On the other hand the trend line of the chart suggest gold today at only £268.54 and the historical average real gold price from 1979 is £446.11. So by both these measures gold currently 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 3.4 times more expensive than that period and rising.

As always do your own research.

Assumptions include:
- Last gold price actual taken midsession on the 28 May 2010
- All other prices are month averages.
- May 2010 inflation is extrapolated from the retail prices index (RPI).
- April and May 2010 average earnings (LNMM) is extrapolated.

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