Warren Buffet has recently presented a case that stocks will outperform gold. Is he correct? Since it is a new year, this gives us a good reason to update our annual gold indicators and introduce a new one to see if gold is overvalued.
Inflation-Adjusted Gold Using Year X as a Base
Let’s start off with inflation-adjusted gold using year X as a base. This one requires a bit of explaining. You often hear about inflation-adjusted gold. This chart shows what the inflation-adjusted price of gold is using the year on the X-axis as the base. The chart is also exactly the same as the gold/CPI ratio except the numbers on the Y-axis are the inflation-adjusted prices of gold rather than the gold/CPI ratio.
For the inflation data we are using How Much Is That In Real Money? by John J. McCusker (which has US currency data from 1665-2001) and the CPI for 2002-2011. All gold data is from chartsrus.com, which has annual gold data starting at 1718 for those interested. As you can see we aren’t too far from the December 31, 1979 peak of $1,742. The reason this figure seems a bit low is the gold bugs invariably use the January 21, 1980 peak number. This is an annual indicator so only December 31 is counted. The average inflation-adjusted price of gold is $523. While many would consider such a number to be laughable, as recently as 2004 gold closed the year at $438 which inflation-adjusted equates to $520. That wasn’t too long ago. Since 2004, the S&P is up only 12%, housing is down over 20% while gold has quadrupled. Gold’s inflation-adjusted price using 2001 as a base is $352. In any event, you can see the key variable in the inflation-adjusted price of gold is what year you decide to use as the base. Undoubtedly the gold bugs will respond by saying CPI numbers are fixed by the government and cannot be trusted. This ignores the fact that we are using McCusker for the overwhelming majority of the data. Let’s keep this in the back of our mind and move on to other indicators to see how they compare to this one.
