When economic crisis come (speculation, economic bubbles and so), wealthy people start to demand precious metals and precious stones to store their wealth; therefore, as nominal prices increases, they have precious stones and metals that show higher nominal prices also. However, the real prices measure through relative prices do not change in the long run; it means that precious metals and precious stones will have a constant price in the long run when people will be exhausted with doing speculations. To show this assertion, this note shows that gold relative price in terms of silver converges in the long run; this long run relative price is calculated in 48.7 troy ounces of silver per one troy ounce of gold. It takes attention that ratio between total silver and total gold in the World is lower than long run relative price; it can be explained by the classical view of Use Value and Exchange Value.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Twitter: Humberto_Bernal
Silver and Gold are precious metals that people take as store of value when economic crisis are coming; these precious metals along diamonds and emeralds are in wealthy people's portfolio; moreover, they expect that these metals and stones show higher nominal price, and this thought is correct; however, in real terms these metals and stones do not show a upward price tendency or downward tendency; they show a convergence price, it means that its value does not change as time passes. This note shows this assertion for gold relative price.
Gold real price shows a convergence in the long run. The gold real price can be calculated in term of silver units; for instance, a troy once of gold showed a price of 30.5 troy ounces of silver in 1900 and 59.3 in 2013 as figure 1 shows. There were years when this price was higher and lower such as 1941, 1968 and 1991 as figure 1 shows. However, this price shows convergence in the long run; it can be calculated in 48.7 troy ounces of silver per troy once of gold. Therefore, according with this information, one can expect that ratio between total silver and total gold in the World is close to this long run relative price, but it is not; this ratio is just 8.5 times; it means that for each troy ounce of gold there are 8.5 troy ounces of silver. This big difference between gold relative price and the stock ratio can be explained by the Use Value of gold and Exchange Value of gold; it means people prefer gold for its properties and it makes that its relative price is higher than the stock ratio.
Figure 1. Gold relative price in terms of silver 1900-2040
(Troy ounces of silver per troy once of gold*)
* Lower and Upper band under 0.95.
Source: USGS Mineral Information and KITCO.
The long run gold relative price is statistically significative. To validate the long run relative price, there was run an econometric model where relative price is a stationary time series under Augmented Dickey Fuller test; the autocorrelation and partial autocorrelation test show the first lag significative; moreover, the residual shows Normal Distribution properties, and there is no evidence of GARCH effect. The results are shown in table 1; the first lag shows a coefficient of 0.93 and it is statistically significative at 0.01 level of significance; this regression takes into account a drift that lets getting a long run expected value of 47.98 (47.0 as it was mentioned above).
Figure 2. Relative gold price Model
ARIMA (1,0,0)
| Variables | Coefficients |
| Relative price (t-1) |
0.93
|
| Long run expected value |
46.98
|
| Observations |
114
|
Source: Stata 12.1 and own calculations.
|
