You don't have to be a lifelong gold-bug to recognize that gold is very reasonably priced right now. Determining if the gold price is reasonable however, can be a somewhat tricky task. Oxford Club editor and analyst Alex Green mentions this in a November interview:
"The second problem- and it's why it's more of a gamble than a solid investment - is that you can't really value gold. With most investments, there are metrics you can use to determine whether you think something is undervalued or overvalued. The problem with gold is that it doesn't accrue interest, pay earnings, dividend, or rental income. Since there is no income, yield, or book value, there isn't anything you can use as a yardstick for value. When people say that they think gold is overvalued or undervalued, I think it's tough to say that."
Yes, he is correct that you can't use traditional investing metrics with gold, but isn't this just as true for all commodities? Does this mean that no commodity can ever be properly valued? Of course they can, and in the case of gold, I think that studying the long term price history is of vital importance.
I adhere to Benjamin Graham's view that, "In the short run, the market is a voting machine but in the long run, it is a weighing machine." It makes sense that gold is hardly getting any votes right now, because in 2014 all of the action has been in the Dow, the S&P, and the US dollar. To be fair to Alex Green's above statements, he still recommends gold as a portion of everyone's portfolio as a form of insurance; in spite of the difficulty of valuing it. In retrospect, the two best buying opportunities for gold would have been 1971 and 2000 in nominal terms. In real terms, however, gold was priced the same in both instances. Here is a look at the inflation-adjusted gold price that economist John Williams came up with using the pre-1980 CPI methodology.
As you can see, we are reaching another one of these historic buying opportunities. Gold is almost as cheap as it was back in 2000 and 1971, in real terms. Maybe the price won't decline to match these two previous points, but buying right now will ensure than you already have a position when the price really turns around.
It is important for Americans to not be too ethnocentric, and to keep a global perspective in mind. I think the case for gold being an inflation hedge has been overstated by some, evidenced by the fact that gold does not move in lock-step with the inflation rate in the US, however currency crises are actively happening in several countries around the world. This year alone, inflation has been quite a battle for nations like Venezuela, Argentina, Ukraine, Russia, Turkey, and Iran just to name a few. Any citizen of these countries would have obviously benefited greatly if they had some or all of their savings in gold instead of their nation's currency, even in spite of the volatility and low sentiment for gold this year. Just because a severe currency crisis is not happening in America doesn't mean it will always be immune from one. America is currently in a long term currency crisis when you consider the fact that in only 101 years, the central bank has eroded the currency down by 96% according to the government's own statistics. This inflation also happened in spite of almost 60 of those years containing a gold standard of one kind or another.
Central Fund of Canada (NYSEMKT:CEF)
This popular precious metals fund is now trading at the highest discount to NAV in the past 10 years. This kind of discount/premium is of course only available in closed-end funds. The current discount is 10.5% of NAV according to the CEF website. The chart below shows the discount/premium history of the past 10 years.
As you can see, the last time this fund was trading at a premium was early 2013, and from there the premium fell and the discount has been increasing since then. The current market cap is 2.88 billion, with 254,432,713 shares outstanding.
The funds holdings total over 3.2 billion dollars are made up 1.69 million ounces of physical gold and 76.96 million in physical silver, stored in the vaults of Canada Imperial Bank of Commerce in Canada.
If you want exposure to gold only, and not silver, then Central Fund's sister company Central Gold Trust (NYSEMKT:GTU)) might be a better option for you, as they hold only physical gold. This fund currently has the same story of being traded at its highest discount in the past 10 years.
The current discount to NAV is 8.6%. The market cap is 892.68 million, with 19.29 million shares outstanding.
Out of the two, I prefer Central Fund due to the exposure to silver as well as gold, and it has resulted in outperforming Central Gold Trust as shown in the graph below.
The discount is also higher with the Central Fund, which makes for a better buying opportunity.
This discount that both funds are offering should not be passed up, as you can profit in the short term if you simply sell the minute that the fund starts selling at a premium, or you can use this as a buying opportunity for the long term gold investor. Either way, this current discount cannot be denied and there is no reason why you shouldn't take advantage and give yourself the gift of some Central Fund or Central Gold Trust shares today before the discount is over.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.