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What Is the Gold-to-House Ratio?

What Is the Gold-to-House Ratio?

John-Rothans

Written by John Rothans

Aug 27, 2021

You’ve probably heard of the gold-to-silver ratio. But are you aware there’s something called the gold-to-house ratio? Here, we explain what the gold-to-house ratio is and why it’s worth calculating.

Explaining the Gold-to-House Ratio

The gold-to-house ratio measures the relative value between gold and real estate. Specifically, it’s the number of ounces of gold required to purchase an average single-family home in the U.S. It works similarly to how the gold-to-silver ratio measures the number of ounces of silver needed to buy one ounce of gold.

That sounds simple enough, right? But what can you learn from this number? And how can you use it to make smarter moves for your portfolio and financial future?

The Meaning of the Gold-to-House Ratio

As the U.S. continues to experience a boom in the housing market, Americans are thinking about what their homes are worth. And they might even be pondering how that value equates to other assets they own.

Gold and real estate are two alternative assets that many Americans own as hedges against inflation or portfolio diversifiers. So it’s natural that there’d be a ratio comparing the two, just as it’s natural that there’s a gold-to-silver ratio.

According to certified financial advisor Daniel Amerman, the ratio “has an interesting historical track record for identifying turning points in long-term gold price trends.” But, he notes, home and gold prices tend to move up and down at different times.

“History shows that if you can buy gold ‘cheap’ while real estate is relatively ‘expensive,’ then on an asset price basis, gold is likely to strongly outperform real estate as an [asset], all else being equal,” Amerman writes. “Conversely, when real estate is ‘cheap’ and gold is ‘expensive’ relative to its long-term averages, then it is real estate that is likely to powerfully outperform gold as an [asset] over the long term.”

Boiling down Amerman’s explanation, keeping an eye on the gold-to-house ratio might help you determine when it may make sense to allocate more money toward gold than real estate and vice versa.

Calculating the Gold-to-House Ratio

Amerman uses data from 2020 to demonstrate a formula for figuring out the gold-to-house ratio. Last year, the median price for an existing single-family home was $241,000, while the annual average spot price of gold was $1,770/oz. Based on those figures, the ratio stood at 136 oz. (to 1), meaning it would have taken 136 oz. of gold to buy one average existing single-family home in 2020.

While both housing and gold witnessed “very good” years in 2020, Amerman writes, the annual average price for gold climbed much faster in 2020 than the price for homes, with percentage gains of 27.2% for gold versus 5.7% for home prices. This gain was almost five times greater for gold than for homes, which was enough to move the ratio in a single year from 162 oz. to 136 oz. of gold to buy a home.

Amerman says the peak annual average price for gold in inflation-adjusted terms in the modern era occurred in 1980, reaching $1,926/oz. (in 2020 dollars). That same year, the gold-to-house ratio bottomed out at 80 oz. Meanwhile, the lowest price for gold in inflation-adjusted terms in the modern era occurred in 2001, when gold fell to $396/oz. (in 2020 dollars). The same year, the gold-to-house ratio peaked at 450 oz.

It’s worth noting that, over time, inflation has caused the dollar’s value to slip. According to The Balance, $1 in 1913 had the same buying power as $26 in 2020.

Why is it important to know this in terms of the gold-to-house ratio? “The dollar is not tied to the value of gold, but gold’s price is linked to the dollar’s value,” The Balance explains.

By learning more about home prices and gold prices in tandem, you can better understand when housing may be expensive or cheap when compared to the current price of gold. With what you know now, do you think it’s time to lean into physical gold, real estate, or both? Download a free Gold Information Kit for everything you need to know about buying gold right now.

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