Which is Over Priced? Oil or Gold?

With Gold surging, is it now overpriced? What about Oil? With the value of the dollar constantly changing, it is hard to tell what it all means. After all, can you imagine trying to build a house if every day when the workers arrived, you gave them a different size ruler?

With everything from lumber to bitcoins skyrocketing in price (or the dollar devaluing), is there any way to tell what the real value of something is? How much is anything really worth? Is Gold overpriced? How about Oil? Is it overpriced? Or is it cheap now that the price has come down slightly? Looking at these commodities in the standard way, it is often difficult to tell.

We could look at the inflation-adjusted price of Gold, but that requires that we rely on (and believe) the government-stated inflation index. But that is just one way to look at the price, i.e.,  by comparing its price 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 is based on the values of their fiat currency and how much they are inflating. You might think that if the currency is devaluing, then all prices should rise equally. But in the real world, that isn’t true. There are inequalities partially because money doesn’t flow equally initially. Eventually, it may even out as traders arbitrage high-priced commodities against lower-priced ones or buyers flock to less expensive alternatives. But how do you know which commodities are overpriced and which are underpriced?

By comparing the price of any two commodities, we can see when one or the other get overpriced. Let’s look at the price of two of the most important commodities, OIL vs. GOLD. Read More.