The real estate to gold ratio measures the amount of gold it takes to buy a single family house. Based on the pioneering research of Robert J. Shiller and Karl E. Case, the Case-Shiller Home Price Index is generally considered the leading measure of US residential real estate prices. The index has a base of Jan 2000=100 and is multiplied by 1800 in order approximate the Average Sales Price of Houses Sold for the United States.
The ratio has an interesting historical track record for identifying turning points in long-term gold price trends. When exatly is one of the assets "cheap" and what is "expensive"? Answering that question is where the Gold/Housing ratio is quite useful. As there is no dollar component in the ratio itself, inflation concerns drop out, and we are left with the value of two of the most popular tangible investments relative to each other.
The chart above displays the 1-year rolling correlation coefficient between the Case-Shiller Home Price Index and the price of gold. A correlation coefficient of +1 indicates a perfect positive correlation, meaning that home prices and the gold moved in the same direction during the specified time window. Conversely, a correlation coefficient of -1 indicates that they moved in opposite directions. There are periods during which the price on gold did not change, which results in a standard deviation of zero and a correlation plus or minus infinity. These periods are removed from the data set and appear as gaps in the rolling correlation series.
Diversification is the practice of spreading investments across different assets to reduce risk. In his book Principles, Ray Dalio called diversification the “Holy Grail of Investing”. He realized that with fifteen to twenty uncorrelated return streams, he could dramatically reduce the risks without reducing the expected returns.
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