At $1000 is Gold Expensive?

If we look at the inflation adjusted price of Gold we see that even at $1000 it is still only about half-way to its all time highs.

For more information see Inflation Adjusted Gold Price .

But that is just one way to look at the price by comparing it to U.S. dollars. We could also look at its price in Euros or at what the price looks like to the people in China or India. And each of those are based on the values of their currency and how much they are inflating.

But a different way to look at it would be in comparison to the price of other commodities.  Theoretically in an ideal world, if the supply of currency is inflating, then all commodities should increase equally. 

But in the real world that isn't true.  There are inequalities partially because money doesn't flow equally initially.  Eventually it  will even out as traders arbitrage high priced commodities against lower priced ones. 

But how do you know which commodities are over priced and which are under priced?

 Very simply you just divide one price by the other to get a ratio.  If we look at the ratio of Gold to Oil we will see how they relate.

Since an ounce of gold is about $1000 and a barrel of oil is around $100 I decided to look at how many barrels of oil an ounce of gold would buy.  You can just as easily divide it the other way but the numbers come out messier. 

So we are looking at barrels per ounce so if Gold is at $1000 /oz and Oil is at $100/ barrel it is obvious that one ounce of gold would buy 10 barrels of oil, right?

And if several years ago, gold was at $500 an ounce and oil was at $50 the ratio would be the same.  So we need to look at the historical ratio and see what a reasonable number of barrels per ounce is.

We used the free market price of gold rather than the government fixed price of $35 / ounce.  We also used the free market price of oil (called stripper) rather than the government fixed price for the period it was fixed.

From that we come up with the following table: