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The Secret to Understanding Gold’s True Value

Jeff Clark, Senior Analyst, 
JUL 27, 2020

There’s one question Mike Maloney and I have been asked more than any other. It’s a favorite question of interviewers, journalists, and podcasters. It’s a fun topic to discuss, and hints at the excitement that could be ahead for gold and silver.

But the nature of the question can be misleading. It draws the focus away from the true value gold can offer.

The question is this: How high do you think gold and silver prices will go?

It’s only natural to wonder where they might ultimately be headed. Especially if you agree with Mike’s prognosis for the monetary system.

But gold and silver are less about price, and more about this…

What Will Gold & Silver Buy You?

Since gold and silver are money, it’s important to view them as such, and not as “investments”. Yes, we’re convinced we’ll make a profit on them, but the deeper purpose lies in their monetary value.

This is why it’s less about their price and more about what they will buy. That’s where true value is found.

If you look solely at price, you might miss the full benefits gold and silver offer. You also might sell too soon… or too late. A “high” price might not be high enough, or a “low” price might actually be high.

For example, if gold rises to $5,700, roughly a triple from current levels, but stock markets and real estate rise commensurately and offer no better value to the investor than they do now, is the gold price “high”?

On the other hand, if gold reaches $3,800, roughly a double from current levels, but it buys two or three or ten times more stocks and real estate and consumer goods as it does now, that’s actually a better value even though the price is lower.

This is why I don’t plan to sell at a pre-determined gold or silver price. Nor some inflation-adjusted price. It’s more about what they will buy me—that’s what we’re trying to protect, after all, our standard of living.

What will they buy us now? And with gold near all-time highs is it perhaps time to exit? Let’s look at the two most common investments relative to gold and silver and see where we stand…

Gold & Silver Ratios to Stocks

One way to participate in the wealth transfer could be to sell our overpriced gold and silver for underpriced stocks. Ratio analysis has its limitations, but with stocks likely headed down and precious metals headed up, this ratio of these two asset classes is likely to get more and more attractive over the next few years for bullion owners.

Dividing gold and silver prices by the S&P 500 can tell us if the recent spike in metals has made stocks a better buy. On the other hand, if the ratios are still low then gold and silver are the better value.

This chart shows the ratio of gold to the S&P 500 from 1970 through Friday, July 24. The current ratio is highlighted in pink, with prior highs noted as well.

Gold / Silver ratio still near lows

Even though the gold price has risen strongly this year and is near all-time highs, it remains a better value compared to common stocks.

You can see just how far the ratio would have to climb before we would consider swapping out gold for stocks—in other words, a combination of rising gold prices and falling stock prices.

Here’s the ratio of silver to the S&P 500 (through July 24).

silver / s&p 500 ratio: what will rise?

Despite the recent spike in the silver price—it’s up 27% YTD—the ratio has registered little visible change. Silver has a long way up and stocks a long way down before this ratio will catch our attention.

Silver clearly remains the better bargain here. Despite breaking above $20, its upside potential relative to stocks is enormous.

Gold & Silver Ratios to Real Estate

One of the more fun ratios for me is the potential opportunity to buy property with our gold and silver proceeds…

Did I hear you say beachfront bungalow?

Here’s the historical relationship between the price of the average home in the US and the price of gold since 1975 (house price divided by gold price)…

gold / real estate ratio: starting to fall

Real estate, priced in gold, is starting to get more attractive, now registering 194 ounces. And this recent decline is without any significant drop in US home prices, which seems inevitable given the state of the economy. Indeed, we think a return to the 135-ounce level of 2011 or the 85-ounce level in 1980 are highly likely.

Here’s the historical relationship of silver and real estate since 1975, also with the highs, lows, and current ratio marked.

silver / real estate ratio: just starting to improve

The number of ounces to buy the average-priced home in the US has started to fall, currently at 16,409. And notice this figure is almost half what it was in March!

This shows that silver’s volatility can change fortunes abruptly, so make sure you’re accumulating what you want before prices and premiums get high again.

Will it take just three mint boxes of silver to buy a house again, as it did in 1980 (excluding taxes)? We’ll see, but we’re convinced this ratio is definitely headed lower.

What Will YOUR Gold & Silver Buy?

What one does with the proceeds upon selling their bullion is obviously a personal decision. But it’s worth contemplating, because if we’re right, gold and silver are headed a lot higher and most other asset classes headed lower, the perfect combination for a wealth transfer.

Instead of stocks or property, would you perhaps start a financial legacy for your family, one that could last multiple generations? Or maybe help your church or charity? Or like my friend in the Cayman Islands, jump on the crash in yacht prices he expects. The possibilities are almost endless.

Whatever you might do, I encourage you in the meantime to keep your eyes focused more on what gold and silver will buy, and less on their dollar price. Then you’ll discover, and capitalize on, their true value.

As we go through the crises, it will take fewer and fewer ounces to not just maintain our lifestyle but improve it. Keep stacking, so you can take full advantage of it.

(Follow Jeff on Twitter @TheGoldAdvisor)