How Does One Value Gold? 20 comments
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I’d welcome any feedback on these questions since I have no idea of the answer: How should one determine the price of gold? What are the variables or ratios that someone ought to use?
I have to say that I have no idea how to make a judgment on the price of gold. It seems to me to completely irrational and that’s why I like to avoid it. With an asset like a bond, you can input a few variables and try to determine if the current yield is too high or too low. Of course, your assumptions may be wrong, but you can plainly see what went wrong.
With stocks, there are all sorts of models to determine value. These can also be wrong, and many are, but at least everyone knows what a P/E Ratio is. But for gold, I have no idea where to start.
Part of this I have to blame on gold bugs who seem to be overwhelmingly irrational and incoherent. I apologize to the more thoughtful gold bulls but your voices are drowned out by the mob.
The only argument I can make out is that gold will go higher because we’re bankrupt and the dollar is worthless. But does that justify any price? At what point could that argument still hold up, yet the price is simply too high? I get the feeling that few gold bugs have ever considered that question.
Are there metrics that you can point to that show how gold’s price should have plunged for over $800 in 1980 to around $250 in 2001, then to over $1,000 last March? My feeling is that a huge weighting to the price of gold is undefinable speculation. It just is and there’s no way to make sense of it.
Any ideas?
Disclosure: No position
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You should be measuring the buying-power of all the fiat currencies versus Gold as a yardstick ( long and short term ).
Get a chart showing inflation corrected Gold prices and you'll see what I mean .
Why hold Gold until the end ?
... because Gold cannot be forged like fiat money.
The banking system will have to revert back to Gold or a %-age of Gold ... and BTW, banks know the real value of Gold of course.
Take an old "100 million Reichsmark" bank note in your left hand , and an old Gold-Eagle coin in your right hand .... then ask yourself "which hand is holding 'real' value" ?
The alternative ( to Gold ) is of course to store 1 million barrels of oil in your back garden !
;-)
PS:
The alchemists tried for centuries to find a way of "creating" Gold.
Seems the US FED has found a better way ( not ) !
jay
Global economy is reasonably estimated using global nominal GDP (currently around $55 trillion). There are also available figures for Treasuries and stock markets (an effective if rudimentary approach is simply to use the S&P 500 as it is already market cap weighted).
Global assets are much harder to estimate but this is probably the most relevant ratio because it reflects gold's relative purchasing power. Clearly it wouldn't make sense for all of the world's gold to be worth more than every asset that could be purchased! Indeed, gold could only be realistically worth some fraction of total assets which throws some of the wilder (Jason Hommel, Ted Butler, etc.) gold price predictions right out the window. In any case, you basically add global stock market capitalization, real estate, private equity, debt collateral, fiat money in circulation, etc. but exclude all credit-based money, derivatives and other financial products that are zero sum (offsetting asset and liability). Let's say the current number for the global asset base is $150 trillion (probably a bit high but not that far off).
Now calculate the global market cap of gold: 5 billion ounces times $900 = $4.5 trillion. Thus the gold to global economy ratio is roughly 12 ($55T/$4.5T) whereas the gold to global asset ratio is currently around 33. Similar ratios can be computed for stock markets and U.S. Treasuries.
To determine if these ratios and thus the gold price is fair, too high or too low, you need to come up with similar ratios for various points in time, such as the 1980 high in gold, the 2001 low, under Bretton Woods (pre-1971), etc. as well as an average over time. If you do the math it basically says that gold is currently comparable to where it stood in the mid-1970's after the 1974 high and before the 1980 high. At the 1980 peak, the ratios were anywhere from 3 to 7 times lower. That implies if gold were to reach a similar extreme today, it could rise 3-7 times from current levels assuming the denominator (GDP, stocks markets, etc.) stays the same.
Alternatively, the average gold ratios over the past 40 years or so imply that fair value lies in the range between $500 and $1000. If we strip out most of the 1990's when the novelty of gold mine hedging and central bank leasing were at their peaks, these fair values become $600 to $1200. I believe at least several of the analysts that predict $1200 gold are basing their numbers on a similar model to the one I am describing.
Finally, my own studies indicate that the historical ratio of global asset values to gold may have been approximately 5 under the gold standard. In other words, gold might have typically represented approx. 10-20% of the world's material wealth in the past. Perhaps this could be viewed as the ultimate fair value of gold. If so, assuming a global asset base of $150 trillion would mean gold has a fair value of $3000 to $6000/oz. ($150T/5/5 billion ounces). Such a price assumes the adoption of a worldwide gold standard and no consequent deflation in asset prices, which may not be realistic. Perhaps $75T might be a better number given the already ongoing global asset meltdown in which case the fair value gold price under a gold standard could be $1500 to $3000.
Keep in mind all of the above gold prices are real and therefore don't need to be further adjusted for inflation because the ratios' denominators already account for changes in price over time.
Since everyone appreciates it, women and central bankers hoard it and it's recognizable money everywhere there will always be demand. The price suppression seen the last few decades is but a reflection of a surging naive belief in paper assets.
And we're seeing now where that has led us..............
"Its price is the reciprocal of the world's stock of faith in the person Ben S. Bernanke and others like him."
If you quit thinking of gold as a commodity and think of it as money, you'll have less trouble with valuation. Central bankers are abusing the world's stock of faith in their currencies and thus the price of gold will continue to rise. The outcome for fiat currencies is always the same, because the tempation to centrally allocate wealth is irresistible.
Gold's rapid rise of the last few years is completely compatible with the acceleration toward the death of the dollar. If you don't believe that the fed's current policy and political capture portend the dollar's demise, if you place your trust in our central bankers to defend our currency, then any defense of the price of gold is useless and time will be the arbiter.
The sign in New York City showing our current National Debt is once again running out of zeroes. Our elected officials are talking about reducing our deficit by one third in ten years. Here's the tricky part. The deficit is a yearly thing and for each year there is a deficit the National Debt increases. So in plain English our elected officials are talking about spending more than they take in for far more than 10 years to the future and have no plans of ever paying off the National Debt. I guess they figure the further out they push it the more likely we are to get hit by an asteroid that destroys life as we know it.
1. Traditional stable currency; and
2. Universally accepted during times of fear and panic.
Energy in this modern era is also a form of currency. Silver has also traditionally also been another form of currency. Right now, gold is trading at historically high ratios to oil and silver. Therefore, as a "stable" currency it appears to be substantially overpriced.
At present I figure that half the price of gold is based on current monetary conditions as a stable currency and the other half of the price is panic-driven based on twin fears of inflation and economic collapse. You can see this in the chart with a long-term base in the $300 to $400 range with a recent spike to the $800 to $1,000 range. My understanding is that the Indian jewelery market stopped buying at $750 which is an indicator of the upper range of the "stable" currency component.
In 1986, 1 Kg. of Gold was priced at 80,000 DM = ca. 40,000 Euros.
Thanks to the Euro ( and the Gold price being supressed ), we can now buy Gold at ca. 21,000 Euros per Kg..
The Germans have lost 50% of the buying power of their savings and money since the introduction of the Euro. Ask any of them ! ... Not to mention the Italians and Spanish etc. etc.
In 1986, a brand new Porsche 911 ( 55,000 DM ) could be bought easily for less than 1 Kg. of Gold ( 80,000 DM ). Today, you'd need ca. 5 Kgs of Gold.
So why is Gold ( and Silver ; and Copper ) suddenly so cheap ?
Well, when in 1971 the UK GBP crashed thanks to Nixon dropping the Gold standard, the UK Government introduced "decimalization" . This was really a cover-up operation to recall the old VALUABLE coinage !
Does anyone here remember the Golden Guinee ; the Silver Crown and Half-crown, the heavy Coppy Penny ?
You guessed it !
The "NEW" coinage was cheap aluminium rubbish.
The FIAT Central Banks no longer had to worry about coins be smelted down to recover the valuable metals contained therein.
My guess is that that is ONE reason why the copper, silver and gold prices are so cheap .. and by coincidence, the US Govt. RECENTLY repeated a warning that it is illegal to smelt the coinage for metal recovery to be resold at a profit !
JMHO FWIW
In Feb 2009 M0 was $842.7 Billion. The US claims they have 262 Million ounces of gold. So The gold prices is 842,700,000,000/262,00... = $3216.41
In Feb 2009, M1 was $1557.8 Billion. The US claims they hold 8,133.5 tonnes of gold. So The gold prices is 1,577,800,000,000/262,... = $5945.80
In 1980, the high gold price was $850. In terms of M0 is should have been $405, and in terms of M1, $1472.52. So it would seem that the objective calculation doesn't work exactly.
There's only about 7 billion ounces of gold on Spaceship Earth- and half have been mined. That's about an ounce per person, half an ounce in circulation per person. It gets scarcer every day on a per capita basis. That's the supply side.
On the demand side, it is and always has been about the consolidation of value. Gold is indestructible, compact, and universally accepted. You can fit your net worth in gold in a car even if you're worth several million. No other substance, save platinum and silver, can compete. Platinum is TOO scarce to have monetary significance and is and always will be an industrial metal, as there are higher value-added uses for it than currency. Silver is excellent for consolidation of wealth, but only to a point- excellent for monetary use in trade, but poor for large transactions and too difficult to store and protect.
To see if it's priced fairly, the chart above is worthless- it's like charting the price of a stock without understanding its earnings. Ratios are the only convenient method- rdd hits the point well above. Think of gold price charts as gold/USD ratios; their only value is in relationship with other key ratios (gold/oil, gold/Dow, gold/housing price, etc.)
One little remark by our T-sec, and gold blossomed out, another [foolish] remark by someone re: the IMF selling 400 tons, wilted that bloom real quick.
People are not sure what to do right now. [no wonder] So when they think another shoe is gonna drop, they hoard mob-like into the market, and then when they see they were wrong, or 'too soon', they all hoard out. (Mob Mentality)
When prices of a commodity yoyo's like this it is showing you it's power. I call them "false starts". People know, and sense there is something bad wrong out there. The wrong people are in charge, people who have no idea what they are doing, and have the banks in their back pockets, and our futures in their hands and they really don't give a "shoe" about us.
SO... You have to be the most careful that you ever have before. Now is the time for your IRA's, ROTH, & SEP contribs to go in.
A nice warm fuzzy annuity with a non-exposed insurance company may be the ONLY thing, and you actually get a fixed and guaranteed return. AND there is talk of these going under short terms [for us matured folks]. AND perhaps a Govt guarantee (why not?)
ANYway.... I strongly suggest at least 10% of your net worth in Platinum. Yup Silver can be weak in here due to droppng industrial, jewelery, and investment demand. NOtice the platinum prices during all the circus acts including Gold and silver of the last three years.
My suggestion, is the annuity to satisfy the Govt deduction, and platinum for the drawer. Term for grins for platinum, perhaps 1 - 3 years...
Lastly, the stock market will remind you of the movie, "Honey, I shrank the kids!" [replace kids with word 'market'.
To understand the 'worth' of any commodity one has to do a little study into.
1) Objective criteria: The labor theory of value.
2) Subjective criteria: The utility theory of value.
Most economists who champion the private ownership of capital are wrapped up in subjective criteria and thus stand on bowls of jelly from whence they propound their theories.
On the otherhand those who champion the public ownership of capital base their theories on the labor theory of value.
Using the last criteria. Gold (as well as other commodities) have certain amout of labor embodied in their extraction and creation. Whilst printing paper money has virtualy no labor content embodied in its creation. Hence the difference in their intrinsic value.
This of course does nothing to prevent, just as in religious experiences, all kinds of smoke and mirrors to cloud the issues in peoples minds and extract a little pay dirt in the collection plate. But over time (that could be eons) the truth will win out as faith in fiat crumbles. (That is the moment of epiphany in religion or for gold it's known as Eurika!.)
So it looks like whippet has got the relationship whipped with sound insight.
Bob
Full disclosure: I love this country, served it for 40 years. Times have changed. Those in power want MORE POWER, unfortunately, at the public's expense. Hell, they're even going after the elitists FIRST! They mean business! God bless us!
On the demand side – there is consumer demand – jewelry and investment demand. Jewelry/end consumer demand is about 60% of gold demand – mostly in Asia – India being the biggest. This demand is very price sensitive. As gold prices go up this demand falls, India imported 850 Tons of gold in ’07, 450 tons on ’08, exported (yes) 70 tons in 1st Qtr ’09. Just remember these emerging country currencies keep falling against the dollar - so their price keeps rising.
Investment demand – this is mostly driven by anxiety – inflation, dollar, any other economic crisis. In Jan ’80 – gold spiked to $850 in response to Russian invasion of Afghanistan, the panic died quickly. Gold price stayed above 800 for exactly 2 days – never to revisit that level till late 2007 – 27 years later. More recent gold spikes were again sparked by Bear Sterns march ’08, and recent QE by Fed – gold spiked to 1000 to immediately pull back. Investment demand has not been able to offset consumer demand lately.
Currencies- Gold price has not done too well against the dollar itself, against Yen it has been a complete disaster peaking at 165K Yen in 1980, now less than 90K Yen. But against some other major currencies – GBP, INR, AU$ - it has risen a lot. Not so much against Euro.
Gold has performed poorly against all asset classes measured in $– inflation, S&P and treasuries last 20/30 years. This fact somehow is always ignored by Gold bugs.
It is difficult to forecast, especially about the future, I personally see downside.
Brilliant! This is the reason Gold has value!
On Apr 08 05:10 PM 12345 wrote:
> How does one value FIAT?
Given that every government of note out there has some, and doesn't want it to become worthless over the long-term, it seems a lot less vulnerable to the intra-country bickering that currencies and other investment vehicles are going through right now.
All value is context sensitive (food vs gold when you're hungry), and as much as gold might *not* be worth, it "seems" a better option than a lot of the other options out there. Too bad most of us have been relegated to "seems" investing. Odd times.
--ikk
Some consider freedom the singular source from which all value in life is derived. Others have little understanding or use for the concept of freedom, hence the disparity of views on Gold.