Gold Is Rich

| Multi Asset

In a famous article from 2013, Erb and Harvey proposed a valuation metric for gold based on its theoretical connection to inflation: they theorised that the price of gold should somewhat be linearly related to the levels of goods and services’ price indices. They named this this the “Golden Constant”, which is illustrated in the chart. The Golden Constant has since become a reference for the valuation of gold.

Our chart shows a scatterplot between the US CPI index and the nominal price of gold. The blue dotted line is the trend implicit in the relationship between both series, estimated via a linear regression. The red dot is the most recent point. From that perspective, gold is clearly overvalued.

Furthermore, we believe that carry is another reliable cross-asset valuation metric. In the case of commodities, the roll yield is often used as a carry measure. Given the steep contangoed forward curve of gold, it also looks expensive.


Gold Is Rich

Source: Unigestion, Bloomberg, as of 31 March 2021

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