Gold Overvalued?

[Polly]

Gold has been breaking new heights every now and then, currently trading at USD651, a new 25 year high.



Here is an article that concludes that USD656/ounce is a fair price on the basis of the expansion of US M1 supply since 1932.  A necessary inference is it is on that value that other political or economic factors/trends looming on the horizon be reflected, e.g. US double deficits, outsourcing, interest rate, double deficits, demand from China, oil price, attack of Iran etc.

Now in 1932 the M1 money supply was $20 billion. The American population in 1932 was 125 million and now it is 270 million. This provides a factor of 270/125 = 2.16. If the old M1 was good enough for Americans in 1932, then perhaps it would be good enough for Americans of today. There are more of us, so I’ll multiply 20 x 2.16 = $43.2 billion.

That’s a dicey calculation, as any economist will tell you. They’ll write books about it. I’ve assumed that the demand for money is the same today as 75 years ago or that money velocity is unchanged. But we all know it’s not. We know that foreigners now demand more dollars than they used to. But do they demand proportionately more dollars? I do not know. We know that payment practices are more efficient, and perhaps people do not want as much M1. We know that interest rates have changed. We know many things, and yet we know nothing. I’ll stick with my factor of 2.16. At least you know how I got it. Alter it if you want to.

Next, the amount of M1 today is $1,372 billion. M1 has risen by a factor of 1,372/43.2 = 31.76. I’ve taken into account the population growth.

Finally, what gold price suffices to monetize this amount of M1? Compute 31.76 x $20.67 = $656.

.....

In this view, gold is one possible opportunity whose fate depends on a number of speculative factors that I have taken pains neither to speculate on or elaborate. But I’ve provided one idea that perhaps gold is neither greatly overvalued nor undervalued at $635 an ounce.

http://www.lewrockwell.com/rozeff/rozeff72.html

[The Smoking Man]

If you have two customers and a limited supply ...

If you have one customer and 2 suppliers with a limited supply ...

Many of each ...

If mining tools are more efficient ensuring a glut?

Supply and demand is a key factor along with ease of aquisition.

The gold market finds its own worth and demand tends to be logarythmic.

One thing is for sure ... dumping the gold standard for the dollar standard doesn't mean shit since gold will always be worth something.

As long as the dollar falls against the world currencies and begins to be more and more empty in its backing (credit society and economy), gold will seem to climb.

But then, seeing what the dollar is worth against gold is like trying to guess the value of a junk bond.

It's like oil during Operation Iraqi Liberation ... Oil went through the roof compared to the dollar however since the dollar fell against the Euro, Europeans barely noticed.

I'd say this author has it the wrong way around. He shouldn't be trying to find out if the price of gold is inflated against the dollar but if the dollar is inflated against the price of gold.

[Polly]

Just a small point, the author is actually extremely conservative in his account, factoring in M1 (physical paper money and coins and savings accounts) instead of the rate of inflation (of which M1 is just a factor).  I don't want to be dramatic, but if the price of gold were only to reflect inflation in the US and USD635 is a fair value for gold on the basis of M1, then really given the exponential nature of US money supply in recent years, one can only say the "the sky's the limit" for the medium term, subject of course to the rise in supply in view of rising prices.

[The Smoking Man]

You'll also notice that he chose a year from the 'great depression' to base his calculations!?

What kind of a loser does this?

[ahem] "Yes the value of gold seems just about right" ... Yeah, provided the stock market has just crashed and business men are tossing themselves off the tops of wall street offices.

Why did he choose this year and not one from the early 80's, the last great crash and when gold hit over $800?

Does this guy think we were all born after 1985?

 

What ... is he some kind of neocon apologist?

[The Smoking Man]

I'd be interested in seeing gold tracked against the Euro for as far back as the Euro goes and see how the price does in comparison.

I think you'd see a much 'flatter' graph indicating a much more stable currency.

[Polly]

And right you are.  Unfortunately for us, the HKD is pegged to the USD.



And gold against other currencies:

http://www.gold.org/value/stats/statistics/monthlysince1971.html

[The Smoking Man]

I know one thing for sure ... people buy gold when they see ecconomic collapse and war.

They are looking at the USA.

Look at when the polls started to go wrong for Bush and the bitching about Iran.

The gold standard is predicting collapse.

You can even see daddy Bush's spike on the chart but since he got out quickly, the chart normalized.

[Polly]

Is this breaking news or what?!  Less demand for USD for the purchase of oil, more downward pressure on the greenback.

Is it too late to put it on the front page Smokey?

http://russia-media.ru/economy/morenews.php?iditem=61

http://russia-media.ru/schlagzeilen/morenews.php?iditem=263

[Polly]

  If you have 40 minutes to spare, may I urge you to listen to the following discussion? 

Although the speakers are highly interested as they work in gold-investment related industries, they do give a nice overall picture of what we know or are vaguely conscious of in the financial market.

And I must say the description of "inflationary deflation" caught my imagination.

Enjoy.

http://www.financialsense.com/Experts/roundtable/2006/0701.html

[Polly]

The biggest picture...



http://www.321gold.com/editorials/tanashian/tanashian121606.html

[Polly]

Gold has gone and done it - after first breaking out upside from its 3-arc Fan Correction in January, a major positive technical development celebrated in the article Gold powering up for major uptrend - SECTORWIDE BUY ALERT, last week it smashed through the ceiling of resistance at and towards $680, with subsequent solid action confirming that this was a genuine breakout....



Many gold stocks are confirming the gold breakout. Of particular note is Streettracks, which is now in position for a powerful uptrend, and is the subject of an update on the site.

So, we are looking very good here. The prospect now is for the uptrend to gather pace. The first stop will be the resistance at last year high, which it is worth noting is nowhere near as significant as the resistance level that has just fallen. Thus, although gold is likely to pause/react when it gets to $730, it shouldn be held in check for too long before the uptrend reasserts itself and it breaks out and advances to substantially higher levels.

http://www.clivemaund.com/article.php?art_id=68

[Art]

One needs to take into account it's value against a benchmark of world currencies as the US dollar has depreciated so much comparison against it alone is useless.

BTW I see the Chinese bourse collapsed today bringing the rest of the world's markets down with it.

[Polly]

  I hope you have not been "harnessed" Art  , as my mom is.  She has been pouring over the HK Financial Times all day .  Incidentally HK stocks dropped another 500 points today.

Seriously, you are right of course, thanks to the United States of Printing Press A, the rest of the world has been in an inflationary mode for some time now.  Basically prices of property (USA until recently, UK, Australia), stocks (USA, what is the price of Google now? ), and commodities have been going up and up.  And in an inflationary mode, we have to hold onto assets, rather than fixed return instruments such as bond, to make money. 

I had been debating between stocks and gold and thought I would go for the latter first, for one thing I believe in beginner's luck and for another, the cycle of commodities has begun and the next 15 years or so should see commodities performing better than stocks. 

There are stocks that are of great interest to me though, even given the cycle, because of the rise of China.  Basically I think any stocks with China as the first word in the name of the company would be a safe bet (the Chinese listing authorities will only allow the adoption of the word by companies with a significant component of state interest).  I will pay particular attention though to China Petroleum and China Rare Earth.  By the way China Oil and Food has recently paid RMB 1 B to acquire a 20.9% stake in the Shenzhen listed company Fung Yuen which we discussed in Biodiesel.

Sorry I digressed.

Timing is of the essense here and I am saving to make a killing  after the big plunge between April to 6th July, as predicted by Blind Man Chan and another guy.  They both said the correction could be the result of act or god, or human commission.

There, you have seen the typical mindset of a Hong Konger - a mixture between the scientific and the mystic

 

[Polly]

I have been thinking about and looking for a well-balanced exposition on last week's US market's free fall (with very little rebound) for a while but could not find any (Read: one that agrees with me ).

Nonetheless this would be a nice introduction to that picture I have in mind,

...for the most part, it was a week investors and brokers want to forget and wished had never happened.

What made the events of this past week so noteworthy was literally the complete absence of a “noteworthy triggering event.” There was no earth shaking terrorist event. There was no catastrophic occurrence of nature. There was no sudden change of a nation’s governing leadership. There were no energy production/ distribution cut backs. There were no new wars declared, or enacted. In fact, overall things (and market motivating factors) were pretty much as they have been for some time now – not any better, but certainly no worse. Still… there was more than some undercurrent of instinctual edginess, or an overriding “malaise of paranoia,” on the part of investors – both individual and institutional – at work here. It wasn’t even the sound of a “pop” that sent investors to the bunkers, it was the perception of one.

http://www.financialsense.com/editorials/cederholm/2007/0303.html

Another way of puting it is the sheer hysterical jitters.  As if everybody was given to know a fire would be breaking out in the very cinema they find themselves in and was ready to go off at the slightest nothing.  A suggestive creek of chair or someone reaching for the armrest would be ample trigger.  To me it is a clear enough reflection that the players are strung to almost a breaking point.  And this can only be because they know the market can keel over any time. 

I hope I am wrong, but the confidence is gone and this is always the beginning of a turning point. 

 

[Art]

IMO With regard to the US market I'd say it's due in large part to people buying on margin getting hit by margin calls leading to distress selling, accelerated by short sellers who have been waiting for just this opportunity to make a quick buck.

Once the markets fall more than 3 - 4 % short sellers know there are going to be margin calls driving stocks lower so it's a perfect opportunity for them to get in on the act which then drives the market even lower leading to further bouts of selling. It stabilises once the heavily leveraged players are out of the game at which point the short sellers start covering their positions and then you'll see a rebound though probably not to pre-crash levels as the margined guys will have been severely burned in the process.