Is gold undervalued or overvalued?…[Unfortunately,] there’s no good way – and definitely no universally accepted way – to determine a “fair value” for gold. Unlike a stock, gold doesn’t have a price-to-earnings ratio that we can easily compare to the market. [That being said, I offer in this article] a logical, real-world price target.
So writes Louis Basenese(www.wallstreetdaily.com) in edited (and in some instances paraphrased) excerpts from his original article* entitled Gold’s Next Move: $800 or $6,000?.
Basenese goes on to say in further edited/paraphrased excerpts:
The valuation problem stems from the fact that gold serves different purposes for different investors:
as a hedge against inflation, or against low real interest rates.
as a hedge against a currency crisis.
as an asset to own when every other investor is saying “Oh, crap!” in response to a sudden collapse of the entire financial system, or the onset of a nasty bout of hyperinflation.
A recent study published by the National Bureau of Economic Research finds that each of the motivations mentioned above only explains a small portion of the short-term price swings… [That doesn’t help us much in finding the answer to our question, though, as to whether gold is undervalued or overvalued? Therefore,] instead of providing you with a clearly defined and justified price target…[let’s try to] understand how low (and how high) gold could go. You’ll understand why in a moment.
The Floor is Set
…[I’m of the opinion that] gold prices could go down to…$900 per ounce by year’s end, based on the most bearish prediction coming out of ABN Amro Group – an educated guess based on the most recent trading history. If we take into account a longer history – say, 2,500 years – the bottom for gold could be as low as $800 per ounce, according to Duke University’s Campbell Harvey…
Time Horizon Matters
The fundamentals point to gold heading lower in the near future so, unless you’re looking to be a short-term trader, I’d avoid trying to play a bounce off the recent lows….On the other hand, if you’re a long-term investor, gold might be dramatically undervalued. Here’s why…
Gold At $6,000?
Below is a chart that shows the level of U.S. gold reserves for the last century or so…and the amount of national debt which has blasted off in recent years.
Now, I’m sure we can all agree that the number one concern facing global markets is sovereign debt levels. The examples of Greece, Cyprus, Portugal and Spain (the list goes on) confirm that too much of something can, indeed, end badly. Accordingly, I’m convinced that the most compelling reason to own gold now is to protect against the U.S. government’s troubling debt levels…[As says] Will Rhind, Managing Director at ETF Securities LLC, “There’s still a very large debt situation with no credible solution. Until the countries put in a credible solution to [reduce] debt burdens, we will look to gold as a currency hedge against that risk” and that’s where the chart above comes in…
As you can see [in the chart above], back in the 1920s, the U.S. government was virtually debt free. Accordingly, the ratio of national debt to an ounce of gold stood at about 0-to-1. At the end of 2012, though, that ratio stood at $61,796 of debt per one ounce of gold owned by the U.S. government. [To suggest that] gold is worth upwards of $60,000 per ounce, however, is completely unreasonable. Given the fact that debt coverage stood at 10.9% at the outset of the Bretton Woods Agreement in 1944, however, does suggest that, were we to go with that as a rough benchmark, we’re talking about a gold price target north of $6,000 per ounce.Again, that’s based on the alleged amount of gold held by the U.S. Treasury. If it’s less, all bets are off. Trust in the central bank would evaporate immediately on any such revelations and, unlike paper money, we can’t mint gold reserves out of thin air to calm the market.
While it’s always prudent to own some gold in your portfolio…[the reason for doing so] varies from one investor to the next.
If you’re absolutely convinced that the U.S. government is on a crash course with a default, I’d be loading up at these levels.
If, however, you’re after a short-term profit, I’d look to be more opportunistic and wait for a pullback below $1,000 before adding to my positions.
Ahead of the tape,
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
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