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I went to an in-law family event last weekend. While there I listened as my wife’s eighty-something year old grandmother said she was upset with herself for not buying gold ten years ago. Apparently she thought at the time that gold would make for a wonderful investment but never got around to acting on it.

You know how you read that when the shoe-shine boys and cab drivers start providing stock tips that it is time to sell your equities? Well when my wife’s eighty year old grandmother starts talking about the price of gold it might be time to consider a similar course of action. As far as I can tell her only other investment experience is putting dimes into slot machines.

What I really wanted to do at that family gathering (other than leave) was ask Granny why she thought gold was a good investment. Because I’ve never been able to figure out why I would want to invest in gold.

The reason I can’t see the investment case for gold is because I can’t value it. It doesn’t pay a dividend. You can’t do much of anything with it. It isn’t scarce. As far as I can tell the price of gold is determined only through the general happiness or discontent of the investing world with the general state of affairs. It is a popularity contest, not something you can actual value.

I guess I kind of share Warren Buffett’s view which he put in a much more interesting context at the 2011 Berkshire annual meeting:

“The classic case of that is gold. If you take all of the gold in the world and put it into a cube, it will be a cube that's about 67 feet on a side and 170,000 metric tons. You could get a ladder and get up on top of it and think you're king of the world. You could fondle it, polish it ... you could do all these things with it ... but it doesn't do anything. You're hoping someone else in a year or five years will pay you for the thing ... that doesn't do anything. You're betting on how much people will be scared two years from now.”

As per usual Buffett simplifies a very complex concept and explains it clearly for those of us less gifted between the ears.

I’ve long searched for a gold bug to do the same for their side of the story. And I think I finally found it in some words in this Jim Grant interview. I thought these words explained gold valuation as well as anything I have read previously:

It is the nature of gold that its valuation must forever be a mystery. It earns nothing. It pays no dividend. No conference call, no management to call up and complain to. What I do think is gold is simply the reciprocal of the world's faith in the institution of managed currencies. It is one divided by T, where T stands for trust. And trust is a shrinking number and will continue to shrink. Therefore, I am still bullish on gold.

Very well said in my opinion. The only thing I need now is for Grant or someone else to tell me how I would know when to get out of gold. How do I spot when faith in the institution of managed currencies is about to increase?

I’m not going to buy gold. But I might buy a basket of gold equities which have dramatically underperformed the commodity. If gold does not go any higher from here I believe this group of equities will perform very well as their cash flow yields will be very enticing in relation to their enterprise values.

My vehicle for making such an investment may be the Market Vectors Gold Miners ETF (NYSEARCA:GDX). The most recent holdings of which are:

#

Holding

Ticker

Market Value

% of net assets

1

Barrick Gold Corp

ABX US

$1,640,964,802

15.69%

2

Goldcorp Inc

GG US

$1,252,701,409

11.98%

3

Newmont Mining Corp

NEM US

$1,009,979,632

9.65%

4

Kinross Gold Corp

KGC US

$593,030,615

5.67%

5

Anglogold Ashanti Ltd

AU US

$551,580,641

5.27%

6

Yamana Gold Inc

AUY US

$542,878,825

5.19%

7

Eldorado Gold Corp

EGO US

$510,634,635

4.88%

8

Silver Wheaton Corp

SLW US

$505,307,105

4.83%

9

Cia De Minas Buenaventura Sa

BVN US

$474,103,207

4.53%

10

Gold Fields Ltd

GFI US

$463,655,905

4.43%

11

Randgold Resources Ltd

GOLD US

$463,630,638

4.43%

12

Agnico-Eagle Mines Ltd

AEM US

$430,572,999

4.12%

13

Iamgold Corp

IAG US

$385,150,822

3.68%

14

Harmony Gold Mining Co Ltd

HMY US

$262,916,726

2.51%

15

New Gold Inc

NGD US

$245,960,681

2.35%

16

Royal Gold Inc

RGLD US

$199,263,817

1.90%

17

Pan American Silver Corp

PAAS US

$160,288,248

1.53%

18

Coeur D'Alene Mines Corp

CDE US

$111,332,456

1.06%

19

Silver Standard Resources Inc

SSRI US

$95,728,230

0.92%

20

Hecla Mining Co

HL US

$90,614,687

0.87%

21

Aurico Gold Inc

AUQ US

$85,567,008

0.82%

22

Minefinders Corp

MFN US

$64,116,619

0.61%

23

Nevsun Resources Ltd

NSU US

$59,174,146

0.57%

24

Aurizon Mines Ltd

AZK US

$50,674,910

0.48%

25

Seabridge Gold Inc

SA US

$50,001,101

0.48%

26

Northgate Minerals Corp

NXG US

$49,669,328

0.47%

27

Great Basin Gold Ltd

GBG US

$45,599,516

0.44%

28

Golden Star Resources Ltd

GSS US

$25,820,942

0.25%

29

Tanzanian Royalty Exploration Corp

TRX US

$24,040,439

0.23%

30

Vista Gold Corp

VGZ US

$12,462,514

0.12%

31

Net Other Assets / Cash

$3,483,109

0.00%

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Jim Grant Explains An Equation For How To Value Gold