Thursday, 15 July 2010

Gold Priced in US Dollars (USD) – July 2010 Update

Within my Retirement Investing Strategy I currently hold 5.4% (down from 5.5% at the last USD gold update) of my portfolio in gold with a targeted holding of 5%. This is a variation from target of only 7% which is relatively small meaning I will not rebalance. Remember also that Gold is the only portion of my portfolio that does not provide a yield (dividends, interest etc). Even though it doesn’t provide a yield and some would even call it a ‘barbarous relic’ I choose to hold it because of its negative correlation with stocks. While one is zigging hopefully the other is zagging meaning I am selling one high while buying the other low. Only time will tell if this strategy will work.

My usual first chart for this update shows the updated real price of gold since 1968, with the wild ride that comes with gold obvious. This month the real (after inflation) price of gold has fallen by 2.0% to $1,208.60 per ounce from $1233.87 at the time of writing. Year on year however gold in real terms is still up by 27.5% from $947.96. The trend line however suggests a real price today of $666.16 and the historical average real gold price from 1968 sits at $615.35. So by both of these measures gold still appears overpriced.

The correlation between the Real S&P 500 (also displayed on the first chart) and real gold stays at -0.31 from last month. The second chart provides the ratio of the S&P 500 to gold demonstrating just how far apart the two can vary. Today this ratio moves from 0.84 to 0.90 month on month. Year on year the ratio moves from 1.00 to 0.90. The trend line however suggests a ratio today of 2.38 and the historical average ratio from 1968 to today is 1.62. So by this measure, as has been the case for some time, it would suggest that if you were looking to choose to buy the S&P 500 or gold then the S&P 500 might be the better option.

The final point to make however is that while both the first and second charts suggest gold is overpriced on historic measures I cannot forget that in 1980 gold reached an average real monthly price of $1,896.71 which is a long way above where we are today.

As always do your own research.

Assumptions include:
- Last Gold price actual taken on the 15 July 2010 during trading.
- Last S&P 500 price actual taken on the 15 July 2010 during trading.
- June S&P 500 price is the close on the 30 June 2010.
- All other prices are month averages.
- Inflation data from the Bureau of Labor Statistics. June and July ‘10 inflation is extrapolated.

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