In a previous post I introduced my theory for an alternative approach to calculate the fair value of gold.
The theory in summary:
Demand and supply agree on a spot price. Gold serves as store of value as well as a tradeable asset (ie. GLD). If we take into account the forces that influence the demand of gold, we can extrapolate the fair value. The Shiller CAPE is used as a measure to de-distort the gold demand. High demand for equities reduces demand for gold and vice versa.
Note: Due to different sizes of the equities and gold market, the transformation is "fit". However, it is a constant factor in the calculation.
Current results - all data as of End of July 2019:
- Shiller CAPE: 30
- Shiller Median: 20
- Gold Spot Price: $1430
- Extrapolated Fair Value of Gold: $2625
- Current Gold Fair Value Trendline: $2334
The market still preferres equities over gold. This provides an attractive price for adding to a gold allocation in a portfolio.
This does not imply any price projections over the short term. But in the long run I expect the gold price to keep up or catch up to the extrapolated fair value.
Note: I always hold a part of my portfolio in gold as physically backed funds and physical.
Disclosure: I am/we are long Physically backed Gold ETFs.