The gold price has hit all-time highs in terms of US dollars. That can make gold seem rather expensive. However, there are distortions when using fiat currency to value an asset, making it difficult to assess how cheap assets are relative to each other. This is where ratios come in handy.

Why asset ratios are useful

Given that investors have the opportunity to switch between different asset classes, ratios may be used to determine the relative asset valuations.

  • Ratios remove the dollar or currency component.
  • Ratios remove the inflation component.
  • Ratios directly compare one asset to another.
  • Studies that have shown that some ratios are mean reverting, and may therefore highlight potential opportunities for profit.

Mean reversion of asset ratios

100 year chart of the gold silver ratio (Source: Macrotrends)

Shown above is the long term chart of the gold to silver ratio. The mean ratio over this time is approximately 55. This ratio has a tendency to oscillate up and down around that mean value. Most of the time this ratio is between 40 and 70. When the ratio goes beyond this band, it doesn’t stay there for long, forming a spike. Whenever price does spike up or down then the ratio tends rebound in the opposite direction. It is a bit like an elastic band that is stretched in one direction. When releases, it pings back and moves strongly in the opposite direction.

The gold silver ratio recently reached the historically high level of 126. That was a signal that silver was significantly cheap relative to gold. Since the ratio was at extreme levels, a subsequent decline was expected.

What asset ratios don’t tell you

When choosing between asset classes, ratios are just one of the metrics that can be used in making your decision. However, ratios should not be used in isolation.

Asset ratios don’t provide any information regarding absolute nominal price moves. If a ratio is dropping, both of the assets could be rising substantially, but one could be rising more than the other. Alternatively one asset could be rising while the other is dropping.

Asset ratios are not very useful when considering short-term asset price moves. The ratio charts span decades, and the changes to the asset ratios can take time to play out. Trading assets using ratios is therefore best suited to the long-term investor who has patience.

Additionally, asset ratios don’t account for all of the other costs and advantages that come with investing.

  • Trading fees
  • Ongoing expenses
  • Dividends and income
  • Taxes
  • Leverage

The ratio charts don’t include any of these factors which should be considered on an individual basis when switching assets.

Consumer price index to gold ratio

Consumer price index to gold ratio (Source: FRED)

The above chart shows the consumer price index (CPI) to gold indexed to 100 in 1971. This ratio was highest in 1970. At that time the rate of inflation was 5%. By 1975, the rate of inflation had increased to 11% but at that time gold price had increased by a much greater amount, hence the large drop in the ratio. The interesting thing about this chart is that currently the CPI to gold ratio is at the same level as it was in 2012 and 1980. As discussed in a previous post about inflation, there are distortions in the official CPI. It would be great to see this ratio chart using Shadow stats figures.

Money supply to gold ratio

Money supply to gold ratio (Source: FRED)

The above chart shows the M2 money supply to gold ratio. The higher the ratio, the better value gold is relative to the amount of currency in circulation. The estimated mean is 10 and in the year 2000 the ratio was well above the mean, suggesting that gold was great value. Currently, gold seems to be at fair value relative to the currency in circulation.

Stocks to gold ratio

Dow to gold ratio (Source: Macrotrends)

This chart shows the Dow Jones index to gold ratio. In the year 2000, 40 ounces of gold were required to buy a share of the Dow Jones index. The higher the ratio, the better value gold is in relation to stocks. From the year 2000 to 2012 gold outperformed the Dow, hence the drop in the ratio. That is not widely known by the general public. Currently the ratio is 15 (close to the estimated mean) but the ratio previously reached as low as 1.5 (a tenth of the current value).

200 year chart of the Dow gold ratio (Source: goldchartsrus)

On a longer time scale, the Dow gold ratio chart shows a very interesting pattern. The vertical red line indicates the formation of the Federal Reserve in 1913. Prior to 1913, the Dow to gold ratio moved within an upward sloping channel. After 1913, the pattern of oscillation of this ratio changed, with the ratio oscillating with a much greater magnitude forming a broadening funnel pattern. The mean ratio looks like it is around 8. If correct, then stocks could currently be considered to be expensive relative to gold. Note that there is a possibility that this ratio could drop to as low as 1. That would be a great time to be selling gold and buying stocks, Although we don’t know if this ratio will reach that level.

Real estate to gold ratio

Median US house price to gold ratio (Source: FRED)

The 40-year mean for the residential real estate to gold ratio is 282( i.e 282 ounces of gold are required to buy an average house in USA). In the year 2000, real estate was expensive relative to gold and for the subsequent 12 years, gold outperformed residential real estate. Again that is something that the general public don’t widely know. The reason is that even though the ratio was dropping, house prices were still increasing in a bubble and leverage is used to buy real estate (rarely the case for gold) making the nominal profits much greater, drawing a lot more attention. Currently, the housing to gold ratio is below the mean, therefore real estate is reasonably priced relative to gold.

Historical house price to gold ratio

The above chart covers 130 years of the house price to gold ratio. The best times to buy gold were in 1925, 1970, and 2001. The best times to switch from gold to real estate were 1935, 1980, and 2011.

Oil to gold ratio

Oil to gold ratio

Above is a chart of the oil to gold ratio over the last 70 years. Oil is currently the cheapest it has been in 70 years. Indeed it is about as close to zero as you can get. Note that it is also far stretched below the mean ratio value of approximately 0.07. If we assume that the mean reversion theory is correct, oil is a better buy than gold right now.

Silver to gold ratio

Silver to gold ratio

We are accustomed to seeing the gold to silver ratio chart but to be consistent with all the other assets discussed so far, shown above is the silver to gold ratio (i.e how many ounces of gold it takes to buy an ounce of silver), Thee mean is approximately 0.018 and the ratio is currently at 0.012. According to this, gold is still relatively cheap compared to gold but not as cheap as it was in March 2020.

Gold miners to gold ratio

Barron’s gold miners to gold ratio (Source: Incrementum)

Shown above is a log chart of the Barron’s gold mining index to gold ratio over the past 70 years. The median ratio is 1.46 and the mean is probably closer to 1. Over the last 15 years the gold miners were absolutely hammered down over relative to gold and this ratio is currently well below the mean. That suggests that gold mining stocks are currently very cheap relative to gold.

Asset ratio variability

Asset ratio variability (Source: Baur DG et al)

A German research paper analyzed various gold asset ratios in detail. One of the aspects studied was the degree of variation in these ratios, shown in the box plot chart above. Because of scaling problems, the gold silver ration and the gold oil ratio are rescaled by a tenth. Gold mining stock ratios were not included in their analysis. The ratios fluctuate the most are those that will provide the most benefit in terms of switching assets at the extremes of the ratios. This implies that silver and oil are the assets to look at when extreme valuations relative to gold occur.


Bases on the asset ratios discussed, we can conclude that at present:

  • Stocks are expensive relative to gold
  • Houses are reasonably priced relative to gold
  • Oil is very cheap relative to gold
  • Silver is reasonably cheap relative to gold
  • Gold miners are very very cheap relative to gold

Bear in mind that this applies to long time scales, and therefore requires patience. Large ratio changes don’t occur within months, and the strategy outlined here can take years to play out. However, patience might be richly rewarded.