Tuesday, 16 March 2010

Gold Priced in GBP – March 2010 Update

In absolute terms gold continues to reach new levels of expensiveness in GBP terms when looking back over historic average monthly data since 1979. However there has been a lot of inflation over this period and so as always I will look at the real (inflation) adjusted price of gold over this period which is my first chart today. The inflation dataset that I will use is the UK retail prices index (RPI).

This chart shows a very different story. Since 1979 we have seen two month average higher real peaks. The first was £840.50 in 1983 and the second was £1042.91 back in 1980. These peaks are 14% and 41% higher respectively than today’s price of £739.12 suggesting that there is still plenty of potential upside.

The trend line of the chart suggest gold today at only £252.79 and the historical average real gold price from 1979 is £430.09. 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.

As always DYOR.

Assumptions include:
- Last gold price actual taken on the 16 March 2010
- All other prices are month averages.
- February and March ‘10 inflation is extrapolated.
- January, February, March ’10 average earnings (LNMM) is extrapolated.

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