What is the right price of gold? How can you know if it's overvalued?
There must be some price that's too high for gold, right?
What is the right price for gold?
By Patrick Follow Wed, 4 May 2011, 5:19pm 6,205 views 116 comments
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Alan Greenspan - explains the purpose and value of Gold
"So let us repeat Alan Greenspan's three main arguments for gold. A gold standard will protect the economy from 1) the business cycles that have long burdened it and 2) the rapid price inflation that Greenspan sees as a future plague. It also will 3) prevent the government from raising funds through the unilateral expansion of money and credit that Greenspan used to regard as a plague on our freedom."
http://online.barrons.com/article/SB120312013624372883.html
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Will the USA sell its Gold to fix its finances - I bet No - Central Banks Know that Gold is a currency and a store of value the average American doesn't:
http://www.washingtonpost.com/national/economy/us-should-sell-assets-like-gold-to-get-out-of-debt-economists-say/2011/05/12/AFIvmI4G_story.html?wprss=rss_homepage
With the United States poised to slam into its debt limit Monday, conservative economists are eyeballing all that gold in Fort Knox. There’s about 147 million ounces of gold parked in the legendary vault. Gold is selling at nearly $1,500 an ounce. That’s many billions of dollars in bullion.
“It’s just sort of sitting there,” said Ron Utt, a senior fellow at the Heritage Foundation. “Given the high price it is now, and the tremendous debt problem we now have, by all means, sell at the peak.”
But that’s cockamamie, declares the Obama administration. Mary J. Miller, Treasury’s assistant secretary for financial markets, said the U.S. should sell assets in an orderly, “well-telegraphed” manner, not in a “fire sale” atmosphere with a debt limit deadline accelerating the process.
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Foreign Central Banks Buy $6 Billon in Gold in 2011 - while we argue what is the value of Gold.
Mexico, Russia and Thailand added gold now valued at about $6 billion to their reserves in February and March as prices advanced to a record, the dollar weakened and Treasuries lost investors money.
Mexico bought 93.3 metric tons since January, increasing holdings from about 6.9 tons, according to data from the International Monetary Fund, and the nation’s central bank later said it purchased 100 tons in recent months. Russia increased reserves 18.8 tons to 811.1 tons in March and Thailand expanded assets 9.3 tons to 108.9 tons in the same month, the data show.
http://www.bloomberg.com/news/2011-05-05/central-banks-expand-gold-reserves-with-6-billion-in-purchases.html
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All assets have already inflated by Fed's crazy printing.
If Fed stops printing, you will see dollar rebound and all other assets, including gold, fall.
Mexico, Russia and Thailand are all "not very smart" nations.
They all have a history of "almost go bankrupt" experience.
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Xenogear - there will be short term rebounds in the Dollar - but, I'd love a good explanation of Why the Federal Reserve will stop printing and more importantly how will they reduce the Money they have created?
$8 Billion is needed by Fannie Mae as of two weeks ago? What will keep Real Estate positive - to protect Banks?
So, why isn't the Federal Reserve raising rates to prevent Asset inflation?
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Chinese invested $469 Million in a Gold Mining Company - Monday...is China consider a Smart Nation or a Not Smart..?
Chinese State Investment Group Buys Gold One For Its South African Assets
By Elisabeth Behrmann - May 16, 2011 3:09 AM ET
Citic Group, China’s biggest state- owned investment company, and partners agreed to buy Gold One International Ltd. (GDO) for about A$444 million ($469 million), gaining gold assets in South Africa.
http://www.bloomberg.com/news/2011-05-16/chinese-state-investment-group-buys-gold-one-for-its-south-african-assets.html
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Bellingham, WA
wk says
On another site somebody accused me of being a mercantilist simpleton.
Thinking about it, it hit me that mercantilism is simply the struggle to be an Owner, not a Buyer.
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Here is a nice analysis of Gold by BBC - and why its been viewed as a store of value for centuries -yes, I'm sure the BBC is just trying to sell gold ;-)
"Gold's position as the ultimate storer of value has remained largely unchallenged for centuries.
The metal's rarity not only meant it became a recognised and trusted form of payment, but also bestowed upon it an almost mystical allure.
This came about not through historical accident or coincidence, but for the simple reason that nothing else fitted the bill; almost every other element is either too common, reactive, corrosive or gaseous. And most of those that aren't are just too scarce.
Throughout history emperors, kings and queens, governments, central banks and investors have trusted gold to maintain its value.
This is simply because gold is a physical asset with a finite supply, unlike cash, equities and bonds, which can be printed or issued at will.
For investors, therefore, it has always been seen primarily as a good hedge against inflation - traditionally, few people bought gold to make money, simply to protect themselves against losing it."
http://www.bbc.co.uk/news/business-13156756
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Troy says
What is the difference?
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I think Troy's comment meant you can benefit more being the Owner of A gold mine - than buying Gold and holding it.
Here is the Definition from Dictionary on my MacBook:
mercantilism |ˈmərkəntiˌlizəm; -ˌtē-; -ˌtī-|
noun
belief in the benefits of profitable trading; commercialism.
• chiefly historical the economic theory that trade generates wealth and is stimulated by the accumulation of profitable balances, which a government should encourage by means of protectionism
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makes sense.
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wk's website
Keep in mind owning Precious Metals Mining stocks is Not the same has purchasing the bullion - lot of risks with Precious Metal Mining shares - Mining is a very difficult business. - this is an investment. Mining Companies can do very well or do very poorly - an Investment is Not the same as Savings or a safe place to store savings.
Gold Bullion is merely a safe way to store a portion of your savings - to preserve the purchasing Power (not an investment). The price of Gold Bullion has Never gone to Zero - ever - the price of a stock can go to zero for lots of reasons.
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Mammoth Lakes, CA
Patrick says
It's A Terrible Time To Buy Gold
Why?
Prices still disconnected from fundamentals. Gold prices are still much too high, far beyond any historically known relationship to rents or salaries.
Uh, wait.
NM
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Rents and Salaries - in what country? Salaries and Rent have been flat in the United States for 8-10 years and Gold has gone up -
what does the Wealthy Chinese or Wealthy person in India think of the price of Gold.
It might be fair to describe the price of Gold high if your time frame is 6 Months - but, how low will it go? I don't know a single Gold expert who knows.
IF you ever decide Gold is something you feel you need to own - you buy into Gold over a number of Months - You Never buy all the Gold Bullion you want to own in one transaction- you spread out your purchases and hope the Market presents you with a Better price along the way.
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"I do love the fact that the Federal Reserve cannot print gold though."
The federal reserve also cannot print real estate.
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George Soros dumps gold portfolio. Is Soros onto something?
http://www.tickerspy.com/newswire/?p=4543
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Housing Watcher - Does your Portfolio resemble George Soros Portfolio? You are aware that Mr Soros's goals and objectives for his Investing are totally different than mine and I suspect your.
First - lots of people buy Gold and Gold related investments as a proxy to Oil. Mr Soros has lots of Oil and Basic material related Investments in his portfolio.
So, Mr Soros prefers to have other Inflation hedges in his portfolio - hedges that may or may not be more volatile than Gold - but, if you are George Soros you aren't really concerned about Volatility of the Stock Market.
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So Mr. Gold Salesman, are you saying that we should not listen to someone who is a mulit billionaire and obvivously knows a thing or two about investing?
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Emulating George Soros Portfolio is probably a good way to build a portfolio - he's way brighter than me. Generally its difficult to emulate Mr Soros strategies when you don't have his Money.
I am Not a Financial Advisor - there are lots of experts that would tell you that Oil related investments will allow you to keep pace with Inflation - but, stocks can be volatile and you have to stay calm during periods like 2008-early 2009.
Sometimes that is difficult for most people to do.
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A look inside of George Soros Fund reveals he still has Gold and Precious Metals investments - he has Not Dumped all of his Gold related Investments - the most recent 13F file on May 16th filed with the SEC can be found - if Mr Soros was truly bearish its hard to believe he would have made some of his recent investments
here:
http://www.sec.gov/Archives/edgar/data/1029160/000101143811000207/0001011438-11-000207.txt
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When everyone is buying gold that's when you know it's overvalued. Real estate bubble redux.
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A good experiment for any one who things Gold is currently a bubble - ask any of your friends how much on their Money is invested in Gold Bullion, Gold ETF, or any Gold Mutual Funds?
You'll discover your friends (I'm assuming the bulk of your friends aren't financially sophisticated - they may think they are) - and most people have close to Zero exposure to Precious Metals and Gold in particular.
Let me know if you try this.
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So if gold is not in a bubble, then why is silver plummeting? I think silver is showing us a preview of the gold market.
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From my understanding, silver is plummeting because it and gold are small markets with high volatility. Gold and silver are on a long-term uptrend, a secular bull market, meaning more than ten years. As the saying goes, "The trend is your friend."
Some resources:
kingworldnews.com
youtube: Jim Rogers, Marc Faber, Peter Schiff, Doug Casey
mises.org: Robert Murphy, Mark Thornton
shadowstats.com
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I think maybe it would be better to come at this from the other direction: Gold is at the right value. It's the dollar that is devalued.
For example, if a loaf of bread costs $30,000,000,000 in Zimbabwe dollars (inflation at 2,200,000%) does this mean that bread is overpriced and overvalued? Hardly, it means the Zimbabwe dollar is devalued.
If an ounce of gold costs $1,500 US dollars, it doesn't mean it's overpriced and overvalued, just the US dollar is devalued.
Really the dollar is in a bubble. It's being overprinted, just like houses were overbuilt. The dollar follows the same supply/demand curve as anything else, too much supply and value goes down.
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Silver and Gold are Not the Same.
Silver is much more volatile than Gold. Demand for Gold is relatively inelastic, Silver more elastic (lots of Industrial uses for Silver), and Silver is a more common mineral on earth than Gold is. Here is an excerpt from a James Turk article that attempts to explain why
"gold's demand clearly arises almost entirely from its monetary use, but silver is different.":
http://www.fgmr.com/why-is-silver-so-volatile.html
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True, silver is much more volatile than gold.
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The IMF even believes that Gold is a Monetary instrument - the IMF.org holds 400 Tons of Gold
http://www.imf.org/external/about/gold.htm
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For those interested in the role of gold in the (past, current, and future) monetary systems, some food for thought:
http://fofoa.blogspot.com
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Egg Harbor City, NJ
thunderlips11 says
Says it right in the article if you bothered to read it.
In the 1970s, 25 percent of member countries' initial subscription and subsequent quota increases had to be paid for with gold. Through various transactions, the IMF acquired 12.97 million ounces (403.3 tons) of gold.
That's 155 billion dollars in May 2011 exchange rates. (in theory) Even if the IMF dumped 10% of there gold supply onto the market, I think it would cause prices to take a nose dive. I could be wrong of course, the average amount of gold traded per day in the 1990's was 1,200 tons, 125 times the world's annual mine production and 9 times the central banks holdings. While it's true the same ounce of gold could be traded several times a day in theory, makes you wonder if trading was forced to stop and all the outstanding holders of gold demanded the physical possession of the gold, would there really be enough to satisfy what the market claims is existing at any given moment. Another words could be a lot of funny money going around.
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What do you mean by "right price"? Back in the Roman times, a gold coin was about an ounce in weight and could purchase a very nice robe and the finest sandals. So, by comparison, I should be able to go to Nordstroms and buy a Joseph Aboud suit (my favorite) and a pair of Bruno Mali's for the an ounce of gold. I think it would cost me about $1500 for that setup...
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First, I have to say that I've read the posts on this site up to my posting. It's interesting to see what has happened with both gold and silver in not just the past 10 years, but in the past 100.
Many people now know that the Federal Reserve is a private institution. This means it can also print as many dollars as it wishes. Unfortuneately, this is at your expense. Example, Hank Paulson threatening congress in 2008 for the (peoples) bailout. Automatically creating the money needed to bailout the banks with the distress call of the economy failing. Then bailing out friends, other countries and a few bonuses along the way. Doesn't it make your upset when somebody shakes your hand and pickpockets you with the other?
I suspect that there will be a QE3, and perhaps even a QE4. We have a small predicament in the fact that if the fed were to raise rates that would impact housing to a degree where people would suffer, and they would rather not suffer a few years than to easily print more dollars. The catch 22 is that if we continue to print more dollars our dollar will continue to depreciate. There is only so long that a dollar can be printed and the fact that all currencies eventually end with their intrinsic value, zero.
Luckily, this can't be said of Gold as it has always had value and it always will. Unless, somebody learns to make gold as they have learned the printing press controls the masses and the masses will call for the printing when it stops and they start to feel the hurt of spending their childrens childrens money. Should QE2 stop, the people will call for a QE3 when their stocks start to devalue. Scenario 2. We go straight into QE3 or some form of it, or perhaps under a different name.
This is true that countries don't use a gold backed system anymore, and it's also true that Nixon closed the gold standard as we could not pay back our debts owed to other countries in gold in 1971. The closing of the standard.
Interestingly, gold not only has merit because it can't be printed where our lovely politicians will print for whatever they wish, or what the electorate does not wish. Gold and silver were a standard to also be used in our American history by taking it out of the banks. Holding the electorate accountable for what was promised.
Unfortuneately, your dollar has been debased. You can't use a silver nickel any longer because they are not silver. Only pre 1964 nickels, dimes and quarters have real intrinsic value (silver). The reason for the ridges was because one man may take a shaving and pass it to the next whereby the same quarter, nickel or dime would not have the same worth. By the way, look up the value of a nickel of 1950 and compare that with 5 cents. You ask where your money has gone?
Yes, central banks do inflate away debt, and by the way corporations love that as well. Except for the fact that corporations don't exactly care about your fixed familys income. So, when it may make trade easier for them it doesn't make it easier for your mom or dad to pay the rent, or by groceries or put gas in their car.
Interestingly, I also noticed a question of why gold has gone higher and silver has decreased. Some will even say plummeted. Well, when the CME hikes margins 4 times in 8 days that becomes a real when large hedge funds start to move out of the market quickly.
I agree with another one of the users on the site. There is no right price for gold. Those in the one camp will make their bets that the dollar will continue to be devalued, and those in the other camp will keep their savings in other investments. Whether it be bonds, CDs, Stocks or whatever your liking. I believe there is a difference. One is paper and the other is the asset. Papers can go to zero, but the gold and silver will not, and when it's in your possession even better.
The fact that this is the 3rd central bank in the United States should be alarming to those that do not know this is the case. The other two were quashed. One by President Andrew Jackson in 1824. There has always been and will always be a press, but whether the American people wish to get their power back is to of their own devise. Congress did give the power to the Fed to not only create money but to inflate the currency while at the same time charging interest on the debt.
Gold is money and paper is not and it never will be. Go ahead and ask north koreans. Not the government, but the people which have gone to their banks and seen a 2 for 1 settlement for what they had worked for. Imagine having 10K in the bank and the next morning you have 2K in your new currency. Yes, it happens, but you say not in America? Well, that's the reason many people hold gold and silver. Again, for 5000 years it has been melted, coined and is maleable and one can carry the metal. While at the same time it is very rare. Although, paper really isn't all that rare. You can go down to the printer and order up 100,000 magazines or whatever may be the case.
The point here is that there are many trees and they have this thing called seeds. There is only so much gold and silver in the ground. There is the same amount of gold as there always has been, but silver is not the same as it is consumed and used all over the world in electronic parts, even a missile contains many ounces of silver. You should look that up as you will be astounded. No wonder the cost!
GOLD is Money. There is no other money and there never will be. Unless, you become an alchemist. However, you wouldn't give your secret away if you discovered you could make gold now....would you.
Regards,
Kins
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FredEx says
Funny thing though... the value of a sack of bullshit was the same back then as it is now. Go figure!
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Shrek, Can't argue with that, but it sure would be funny to see people chopping down their trees if they were able to run their own press.
Seriously, tell that to the man that started trading the liberty dollar a few years back. He was just recently convicted. I won't go further, but you do the research. Just joking with you Shrek, but it is an interesting story if you havent' read about it or listened. Check it out on youtube as well.
Of course. When government intervention to a monopoly comes into play it's also a different story. Theoretically, Yes. I understand your point and agree. My statement is based on time. Currencies have come and gone, but gold has not had this problem. I wonder if the fed would allow us to trade feathers or beads if it started to take hold instead of the dollar.
If I remember correctly what does the Constitution call for as a medium of exchange in article 1 section 10?
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San Jose, CA
I've tried to comment on this post before but the browser ate my post... :)
Gold is not money. Money is money. Every argument for calling gold money could be applied to almost any commodity. I also don't agree with the arguments. People always seem to forget what the purpose of "money" is. Its to facilitate trade. Or to put it another way its a way for people to function in a society where people wish to exchange goods and services.
If whatever is used as money has any use other than to facilitate trade, then its wasting a resource. Gold has some minor uses (good conductor for one, looks pretty to some), so it should not be used as money. I actually would argue for pure digital money. Not backed by anything other than the police force which enforces the nations laws.
I have a lot more to say on this topic. But I don't have hours to type because my TIME is worth money (yes time is a resource).
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San Jose, CA
To answer Patrick's question based on the premise that gold's "value" is in its uses (jewerly, conductors, insulators, etc), we need to look at what most people still believe is the way to price any service or goods. Supply and demand.
Now when someone says "right price" for anything I think "in a world without speculation, what would someone pay for said good".
Since there is real demand for gold (not just speculators), it should be priced by its uses and how much it costs to produce. If it sells for less then the costs to produce all the producers will go out of business. In theory that would set the floor. The demand sets the ceiling... I don't have any easy way to figure out either of those, but they can be determined and thus a "right price" can be determined....
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San Jose, CA
One last point. No resource is truly renewable. There are fixed number of atoms on this planet (not accounting for random space rocks). So, although gold is *less* renewable then say trees (but more than oil), it can be reused. If at some point all the gold is "consumed"... then at that point "production" will be limited to re-purposing.
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Patrick,
Here's one way:
http://gold.bullionvault.com/How/GoldValue/#MAREKK2
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lol, The level of ignorance I see in some of these posts above is staggering.
"Gold is not money. money is money" - This is as absurd as it gets.
For all those who think Gold is not money, please explain why the United States Treasury holds gold on its books. No one has verified whether the gold is actually there, the powers that be (TPTB) are super-secretive about it.
Obviously, you can't answer that question reasonably, because gold is money. Has been, will always be.
Here's Ron Paul grilling the Fed officials on the Treasury gold: http://www.youtube.com/watch?v=_eExucI3IWs
Look at how they deviate from answering the real question. I think this says enough that gold is money. Irrefutably.
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To understand truly what money is and what has the government done to it, I direct you to the legendary Murray Rothbard's classic:
http://mises.org/books/whathasgovernmentdone.pdf
It is a small book, just 130 pages (relative to other long and drawn out economic books that are total crap) and it highlights some very important issues surrounding money.