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  • The “fair price” for gold

    Posted by Frugal on September 9th, 2010

    “Gold closed at new high!” That was the Tuesday headline on Marketwatch.com. I checked right away, but didn’t see gold cash price breaking new high at $1265. After reading the article, it’s really just a new high in the nearest futures market.

    “Investing” in gold is probably one of the hardest arguments to make, since gold simply doesn’t generate any interests nor dividends. Plus that many people who are interested in the commodity market will try to make the argument that nobody needs gold to survive. On the other hand, we all need oil/energy & grains. However, that simply doesn’t matter much for the last 10 years for gold investment. After all, everybody sells his or her investment at the end (whether it’s before or after death), and the only thing that matters is whether you are able to buy low and sell high.

    After observing this market for almost 8 years myself since my initial investment back in 2002/2003, I can clearly see that the character of this market is slowly changing from stage 1 to stage 2, with more new participants coming in. Based on my judgment, it’s probably not at the mid-point of stage 2 yet. However, the price has probably reached slightly more than what its “fair price” should be. My definition of “fair price” probably will upset both gold bulls & bears. For the perma-bulls, gold should be trading at above $2200, an inflation-adjusted price from last peak set back in 1980 at about $850. For the perma-bears, gold at any price is probably too high, especially its historical record of hedging against inflation from 1980 to the low of about $250 in 1999/2001 is simply ridiculous (and that is definitely true). I take the middle ground, and would use $400 and adjust it by inflation for the last 20 years, and I would get just $1085.

    Why do I use an ad-hoc $400 instead of $850? Peak prices (of $850) are crazy prices. They are always outliers. They do not make sense. A little less than half of the peak prices based on the trading around the peak of $850 before & after 1980 appears to make more sense to me.

    I also believe that the inflation-hedging power for gold is valid, but it needs to be judged from a very very long term (way beyond 20 years from 1980 to 2000), just like the argument for housing prices always go up or stock prices always go up in the long term. In fact, all of them (gold/house/stock) do go up in the long term, but the only problem is that we humans only live for about 100 years, out of which we may earn & accumulate for some 40 years, and invest for just 20/30 years at best. The true “long-term” (in the order of 100 years) is simply too long for us. That makes all the differences in the whole world when it comes to “investment”. Depending on the era that we were born, we may or may not enjoy the prosperity at our respective ages.

    So is today’s gold price too expensive? Based on all short-term technical indications, I think gold will soon come to a short-term top, possibly exceeding the last high. For the timeframe, I would say probably give or take 1 to 2 weeks. My own actions in this market have been mostly neutral. Try to buy the next dip if you can catch the break. Think of saving away in terms of GLD/SGOL or better yet in physical gold (so that your gold won’t shrink in size due to ETF fee). Such saving definitely won’t make you rich overnight, but at least you should be able to preserve your wealth.


    More related posts:
  • Gold at $2000 WILL be expensive!
  • The oil conundrum

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    2 Responses to “The “fair price” for gold”

    1. iblitzkrieg Says:

      Gold can be regarded as an investment vehicle but without any yield or dividend at all and the only way to make money from this commodity is the price difference we have bought and then sell now.Although not as a currency, gol is the most liquid asset we can transact at any point of time. Given the weakening of the dollar, the euro or any other currencies that are not anchored, gold has become the most trustworthy fiat currency everyone could believe in and gold has been in the bull market for the past 10 years or more and especially beginning the millenium when the IT bubble burst and all the way now to our current recession/depression beginning the end of 2008. With the weakening of the dollar and now the EUR, the paper assets have now become less and less attractive except just being the medium of exchange that we must have and use but in terms of intrinsic value, the paper money has become more and more volatile so that the trend for the value of gold should be all the way up and it seems that we don’t see any bear for it for now and the forseeable future.

    2. Lancy Blatt Says:

      You can find places that offer up to about 90% of the price of scrap gold, if you look around. Beware of dodgy Cash4Gold type of companies that provide only 20% of the value, or can not be borrowed before they are golden, do not you pay for “appreciation payments” to go back when it rejected the offer of their garbage.