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frizzers

Valuing Gold

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I am looking at various ways to value gold.

 

For example:

 

1. Cost of production.

2. Relative cost of gold to commodities , stocks, housing ,

3. Price of gold to money issued , debt , forex holdings

If you have any ideas as to valuation models, please post them below.

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Have you see the following from this month's version of Dr Bubb's Diary?

 

1/

chart-us-debt-debt-limit.png

 

2/

Deutschebank is talking about a "new concensus" towards Gold.

And that could mean the Bull market is over

 

EXCERPT

 

From Tailwinds To Headwinds

The move higher in the gold price since 2001 was driven, in our view, by a

collapse in real interest rates, a rising US equity risk premium, a new long term

downtrend in the US dollar, de-hedging by gold producing companies, a more

coordinated programme of European central bank gold sales and rising

geopolitical risk compared to the 1990s. Private sector investment in gold was

also facilitated by the launch of physically backed gold Exchange Traded Funds,

which become an efficient route to gain exposure to the underlying gold price

particularly when compared to investing in gold producing companies.

 

However, many of the forces that drove gold prices higher are now moving

in reverse. In retrospect, we believe the first sign of a more hostile environment

for gold began to emerge from July 2011. This marked the low point in the US

dollar trade-weighted index and the start of what we believe is a new long term

uptrend in the US dollar. By February 2013 the case for a more convincing

turn in the US dollar had become even more compelling prompting DB’s FX

 

Research team to upgrade their medium to long term targets for the US dollar.

Not only would be the US benefit from an improvement in capital flows

through the country’s superior growth performance, but the US dollar would

also benefit from other central banks efforts to weaken their own domestic

currencies, such as the Bank of Japan. We expect this new exchange rate

environment will see the US dollar appreciate against all major currencies and

that this strength will be long in duration. Indeed history shows the US dollar

exhibits long run cycles of rising and falling for extended periods of time and

that these cycles can last anywhere between 6 to 10 years, Figure 1.

 

in short, they see:

 

+ A stronger US dollar

+ Rising real interest rates

+ Less need for Gold as a hedge for Equity risk

 

 

Conclusion

We find that financial forces started to move against gold in July 2011, but, it

was not until the end of last year that the tailwinds pushing gold prices higher

from exchange rate, equity market and real interest rates trends were all

moving into reverse. Soon after, holdings in physically backed gold ETFs

peaked.

 

Source: 18 April 2013 / Special Report: Gold’s New Reality

 

there's also an old thread somewhere, that values Gold through Ratios,

to things like: CRB, DBA, etc

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How about taking the value of USD out first of all?

 

 

You mean in terms of Gold valuation per se or specifically Gold vs US debt ? At least with respect to the latter doesn't seem to make much difference:

 

gold-usd_zps2a8d3bfd.png

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I am looking at various ways to value gold.

 

For example:

 

1. Cost of production.

2. Relative cost of gold to commodities , stocks, housing ,

3. Price of gold to money issued , debt , forex holdings

 

If you have any ideas as to valuation models, please post them below.

 

there's also an old thread somewhere, that values Gold through Ratios,

to things like: CRB, DBA, etc

 

 

Link: Measured in Gold / Charts by G0ldfinger

 

 

 

. . . and for what its worth:

 

Gold vs (official) CPI

 

gold-cpi_zps22686865.png

 

 

Gold vs M1

 

gold-m1_zps390d5727.png

 

 

Gold vs M2

 

gold-m2_zpse4eeddb8.png

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You mean in terms of Gold valuation per se or specifically Gold vs US debt ? At least with respect to the latter doesn't seem to make much difference:

 

gold-usd_zps2a8d3bfd.png

 

It's supposed to be a currency isn't it, so why value it in dollars?

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I found this Video, but have had time to watch it yet: http://www.youtube.com/watch?v=F27fGMXg3o0

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It is difficult to value gold because gold itself may become the bedrock of value, ie, that which does the valuing. If something like the US dollar itself is put in the mix, with ongoing concerns about national debt and solvency, then the gold price can become arbitrary. It will probably depend most on the desirability that investors and central banks have to own the perceived strongest form of liquidity/ strongest symbol of money [perceptions!]. For that scenario, and for the present bull market to continue, you'd have to see a continued global debt deflation.

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CC, I see you won the argument on gold vs the bears in FT alphaville..

 

Im not feeling so confident at the moment it has to be said

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CC, I see you won the argument on gold vs the bears in FT alphaville..

Link?

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I believe the best way to value gold is cost of production. Investment demand, as we have seen is fickle affected by

psychology.

 

All in average costs for the industry appears to be about 1100-1200$/ounch (including costs for exploration to replace reserves).

 

http://goldnews.bull...ining-062820123

http://beta.fool.com...-on-gold/29786/

 

These costs appear to rise fast about 10%/year. These figures provide the only solid basis for gold as investment.

As far as QE is concerned, it seems that as long as inflation fails to materialize (in the official figures), QE is disregarded as a reason for investment. True, some central banks are buying but the amounts so far are too small to make a difference. The Chinese central bank which might be expected to be interested in diversifying some of its enormous reserves, has declared that it it happy with more or less the gold reserves its already got. (at least this is what they say).

 

Other methods of evaluation of gold involving debt and predicting high prices may be reasonable, but it appears with hindsight that they should be regarded as a POSSIBILITY not EXPECTATION.

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Remembering when...

 

I posted this on my Diary in August 2011, when Gold was at/near its high

 

A GREAT CHART:

Gold price divided by S&P500 dividends

 

(it was published in the MONITOR column of today's SCMP)

 

And it shows three peaks, with each on topping at, or near 80x dividends...

and the latest peak is now very near to it.

 

Tom Holland's comment:

I was intrigued to get a copy of the ... chart from Hong-kong based research house GaveKal showing that relative to dividends on US blue chip stocks, gold is now as expensive as it was during both the second oil shock of 1980 (when it hit $850) or the Great Depression of the 1930-39's

 

That implies that either stocks will rise or gold will fall in the near future. Take your pick.

 

S&P500 dividends Data, from 1871 etc.:

 

Link-1: http://people.stern....file/spearn.htm

Link-2 : http://people.stern..../spearn.htm

Link-3 : http://www.early-ret...end-yields.html

from 1871

 

Current Dividend: 24.36 / Last reported June 2011.

/source: 'http://www.multpl.co...p-500-dividend/

 

Recent Gold high:$1910 / 24.36 = 78.40

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