KWN Turk Gold Charts

There is an article over in King World News called The Most Important and Extraordinary Chart for 2012. Here's the chart:

Turk argues that Gold Stocks are cheap relative Gold, based on the above chart.

I disagree, and here's why.

Rather than look at the price history of Gold and Gold Stocks, let's consider the value.

Gold isn't as easy to find as it used to be.  All of the easy gold has been discovered and mined.  If you look at the quality of gold discoveries these these days, in terms of grams per tonne, single digit numbers are the normal these days (they used to measure them in kilos per tonne), and they continue to decline.  So, gold discovery and production are becoming increasingly expensive, and the value of Gold Stocks will continue to decline into the future.

Gold on the other hand is transitioning into the role of international trade money, and so it's value is increasing.  This is why the gold price is rising:

Ironically, the reason that Gold is increasing in value also directly contributes to another reason that Gold Stocks are decreasing in value.  As an international money, gold stocks are increasingly likely to be nationalised, and this increasing risk decreases the value of the Gold Stocks.

So, with Gold Stock value decreasing, and Gold value increasing, it is straight forward to see that the Gold Stock to Gold ratio is headed lower.  This is clearly a case where regression to the mean does not apply.

Once again, the importance of understanding the difference between price and value becomes apparent.  Based on historical prices, the Gold Stock to Gold ratio looks cheap, however, based on likely future value, it does not.