How to Price Gold and Silver

What is the real value of gold?  Everyone should have a holding in precious metals, but as an investor who started accumulating (and speculating in) gold almost 50 years ago, I have learned (often the hard way) that precious metals should only be accumulated when their price makes them a good value.

This begs the question, “When does gold’s price represent good value?”   Today I am sending you a deep analysis, based on this 50 years of experience, of gold’s pricing in terms of inflation that helps answer this question.   This research is part of a $39.99 report, but I am sending it to you free and without obligation.


Cuban 1/10th ounce gold coins.

A collapsing US dollar is one of the greatest risks we have to our independence, safety, health, and wealth.  Yet there are many signs that the greenback’s strength is in serious jeopardy. 

One frightening statistic is the $502.25 billion trade deficit that the US logged in 2016.  This is the largest deficit in years.  Many factors such as growing federal budget deficits and low national savings mean that trade deficits are likely to widen even more.

The growing federal budget deficits also increase the national debt.  When the Dow Jones Industrial Average recently passed 20,000, another milestone of “20” took place that has a much darker meaning to your and my spending power.  The U.S. national debt passed the $20 trillion mark.

The problem is that the Dow is likely to come back down.  National debt probably will not fall.

In the past decade US debt nearly doubled and according to the Wall Street Journal, the Congressional Budget Office estimates that the rate of  debt will continue to rise for at least ten more years.  That debt we are looking at is all the debt issued by the US  Department of the Treasury since 1790 but does not include state and local debt.

And, it doesn’t include so-called “agency debt ( debt issued by federal agencies and government-sponsored enterprises) which is “guesstimated” to be another $8.6 trillion or so.

And, these dreadful numbers do not include the so-called unfunded liabilities of entitlement programs like Social Security and Medicare.

Federal National Debt per person is about $60,923.  If one adds in all the other debt each and every American owes over $100,000!

How can America pay this back?  The answer is they cannot.  Payback however actually does not matter.  No one expects the US to pay back their debt.

Investors do expect the US to pay interest on its debt and this is where a big really problem looms…  in rising national debt service During most of the last decade when the national debt was skyrocketing, interest rates were plunging and have remained really low.  Now rates are expected to rise as will the US debt service.  The chart from the Congressional Budget Office (CBO) shows that debt service is expected to more than triple in the next ten years.

dollar charts

This is an extra half trillion dollars a year that won’t be spent on roads, on the military, on health care or the environment or schools.  That rising debt service creates a vicious cycle that can only lead to  a devaluation of the US dollar so the debt can be paid, but in phony terms.

This is why investors need to own gold and precious metals.  However because metals are commodities and markets fluctuate for many reasons,  gold is not always a good value.

Good value investors look for “ideal conditions” before they invest long term in gold because there are times when a rare distortion in gold’s pricing occurs and the price drops to a point (that history has shown) where it will “almost always” rise.

The words “almost always” indicates that there is risk.  There is risk that a basic fundamental has changed and the distortion will not correct in any targeted period of time.   Or a new fundamental has shifted dynamics to such an extent that the distortion never corrects.  There is always risk.  Profit is the reward for taking that risk, but there is always a chance of loss which is why we should always seek a price that represents good value.

The way to look for Gold’s ideal price is to compare it to inflation.  

This is not as easy as it would seem because inflation is hard to define.  Gaining a true perspective on gold’s value is also difficult because the price of gold was fixed for many years.  The gold price was fixed at $35 an ounce before and at the end of WWII and this fixing did not take into account the huge inflation this conflict created.   This also impacts any accuracy in understanding what the real the price of gold should have been at the end of the war.

These factors distort the accuracy of the answer to… “How much is gold really worth now?”  What is its real value?  This is truly THE golden question.

Here are a few theories that can help us understand the relationship between the price of gold and costs of living.

First we use gold’s 1944 price and the costs of houses and cars and wages at the same time.  Since the mid 1940s US median income increased 29 times.  House prices rose 47 times.  The cost of cars jumped 36 times.

Gold was up 35 times in the same period from $35 to $1,235 an ounce.

If these conclusions are accurate,  it means that gold was a reasonable hedge against inflation.  Had you stored a pile of this precious metals in 1942 to buy a car, now you could do it.  A house maybe not, but the statistical house purchased today might be very different from the statistical house purchased in the mid 1940s.

The gold/cost of living relationship is true for the cost of going to a movie, up 33 times.  Apartment rentals are up 34 times as well.

But other basics have inflated far less.  Gas is up 19 times, but of course bounces around a lot.  Postage 16 times.  Bread 21 times.  Sugar 10 times. Hamburger about 13 times.  Coffee  11 times.  Eggs 13 times increase.  Milk 16 times.

Gold failed for keeping up with education.  The biggest increase is for a Harvard tuition, up 107 times.  Or does this mean that a Harvard education has become a really lousy value?  That’s a question for another time.

This first comparison suggests that gold is not necessarily badly undervalued at a price of $1,225.   If the conclusions of the inflation are correct, this first comparison suggests that anytime gold drops below $1,225 it is likely a fair value, priced about where it should be in relationship to other costs of living.

Second Comparison


Another way of looking at inflation is to lump all the price increases together.  In this instance, according to the inflation calculator website that uses the graph above,  prices overall have risen 13.7 times since the end of WWII.

This second comparison would suggest that gold, up 35 times, has risen far more than inflation and is not a good value at $1,225.  However because the price of gold was fixed at $35 an ounce, the original price must be suspect.

Third Comparison

If we use the 1944 inflation rate and compare it to the the price of gold in 1971, we see a value conclusion similar to comparison #1.  Gold is a fair value at around $1,225.

Why 1971?  That’s the year President Nixon told the Fed to stop honoring the dollar’s value in gold.  That meant foreign central banks could no longer exchange their dollars for U.S. gold, essentially taking the dollar off the gold standard.  Unhinged from the dollar, gold quickly shot up to $120 per ounce in the open market.  This $120 price is a glimpse of what the correct price of gold may have been in the mid 1940s.

If this third theory is correct, the price of gold has risen from $120 to $1,225, up about ten times, less than the 13.7 times inflation from 1945.

On the other hand gold’s price rise from 1971 is still much higher than inflation from 1971 until now.  The the inflation calculator website’s chart below shows inflation since 1971 has pushed prices up 5.8 times.  This would suggest that gold around $696 an ounce would be a good value.


However since the $35 an ounce gold fixing obscures the true price rise, if we split the price half way between the $35 and 1971 price ($120), we get perhaps a more accurate view.  The adjusted price is $77.   If $77 was a more accurate real value for gold in the mid 1940s, then its price has risen 15 times and is in line with the 13.7 times cost of living increase.

Fourth Comparison

The fourth comparison uses a chart from that shows the price of gold since 1905 without adjusting for inflation.


The same site has this chart showing the price of gold based adjusted to the Consumer Price Index.


In this comparison gold’s actual price is almost the same as its adjusted purchasing power price, around $1,235.


The comparisons above are indicators that the price of gold is likely to continue rising and falling along the cost of living increases from a current fair value of $1,225.  This is the premise we use in our good value investing course Pi.

We keep the $696 price in mind when we calculate potential draw downs, in case the assumption of a $1,225 fair gold price turns out to be horribly wrong.

These comparisons crystallize the fact that there is risk when it comes to speculating in gold.   They remind us never to speculate more than we can afford to lose or at least hold for extended periods of times.  They also remind us not to catch a gold fever when we read claims of $2,000 or $5,000 an ounce gold!  Eventually the huge American debt will fire up inflation again and that will eventually turn into mega inflation.  Then gold prices may shoot that high.  In the interim whenever gold drops below $1,225, its probably a good value and investors who accumulate below that price will do well.

There are other ways to cash in on precious metals.  One approach is to keep an eye on the Gold Silver ratio.  When the Gold Silver Ratio reaches 80 and gold is at or below $1,225 a speculation in silver is most likely to be a good value.

This value indicator is simple because the gold silver ratio is rarely as high as 80, only three times in 36 years as the chart below shows.

gold silver spread

Chart from

The spread hit 80 in 2015 and again in March 2016, but we can see from the chart above that a drop in the spread was on its way.   The trend was for a continued lowering of the spread as silver’s price rise was much stronger than gold’s throughout 2016.

This chart below from shows the trend clearly.


There are numerous ways to invest in gold and silver, as a short term speculation for quick profit or for long term accumulation to combat the fall of the dollar or whatever currency you hold.   America is not the only country with an overvalued currency.  Whichever approach you choose, if you apply these value principles,  your odds of increasing profit and avoiding serious loss improve.