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I have pointed out previously how James Turk uses his Gold Money Index to estimate the fair value of gold (NYSEARCA:GLD). You can read it in this article. In that article we estimate that gold should be at around $12000/ounce in 2011 if we compare the gold price with the amount of foreign currency reserves held by the central banks around the world.

Apparently, Jim Sinclair is using another metric: he divides the amount of federal reserve custodials by the amount of gold at the federal reserve (260 million ounces since 2006). This metric has been rising very quickly since 2008 (green line on chart 1) and is estimated at $7000/ounce.

Historically, the gold price would follow these metrics (see Chart 1 1970-1988). But after 1988, the gold price lagged the money creation by central banks until 2000. From 2000 onwards, gold is trying to catch up with the growing money supply. So today, we still have this big gap between the estimated fair value of gold ($10000/ounce) and the current price of gold ($1600/ounce).

The broader metric is the U.S. external debt versus gold, which estimates gold to be at $20000/ounce. The narrower metric is the money supply M1 versus gold, which estimates gold to be at $5000/ounce.

All of these metrics point to a higher gold price in the future. So when do we sell our gold? We sell when the yellow line (gold price) hits one of these black, red, blue, green or purple lines.

Chart 1: Gold Price Estimates

Disclosure: I am long GLD.

Source: How Will You Know When It's Time To Sell Your Gold?