A common complaint about investing in gold is that you can't gauge any real value for it. As Warren Buffet said - they pay men to dig it up, then they put it back into a hole and pay men to stand around and guard it (paraphrasing). If you look at a stock, you can see its net income and dividend payout and, as a telling chart in one of John Bogle's books on mutual funds shows, this is a very good gauge of its rightful value. The chart goes back over the last 100 years or so and plots the sum of the constituent companies' eps and dividend vs the major stock price index. The two plots form a DNA-like spiral and wind up at virtually the same destination on the graph after over 100 years of market turbulence ! Oh, would that it be that we had such a handy gauge for the value of gold.
But wait a minute. Maybe we do. If you look at gold as having the purpose of being an alternative currency, you can compare the government printed monetary base with the government backing of that paper with gold. This is something that you can chart historically just as in the above chart for stocks. If you do, you see the following from an array of fascinating graphs at dollardaze.org
Here we see something like Bogle's DNA spiral for stocks around eps and dividend payout. Only the spiral seems to be around the confidence level in government printed money. There was a loss of faith in government during the 30s and gold wound up climbing to and overshooting the 100% backing level. Then the backing level came down to the 15% - 30% high confidence level at the other end of the spiral. Then came Nixon's decoupling of the USD from gold in 1971, and things soon started heading back to the no confidence condition of the dollar in the late 70s, and gold again went to and beyond 100% backing. Then came Volcker's draconian defense of the dollar, and back we went to the high confidence zone. Now we are having a humdinger of a currency confidence crisis, and gold is extremely cheap on this value gauge - not even starting its trek to the other end of the spiral yet. Considering that the confidence level in all printed money right now makes 1980 look like a dollar love-fest, you'd have to say gold is severely out of whack and perhaps due for a move.
Disclosure: GLD, DGP