ringledman
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Gold above €950. Obviosuly the weakening euro is a major cause of this but gold at near 1K an ounce is big news.
gold has just broken Euro 1000 per oz.
Just how high could gold go?
May 17, 2010, 03:55
Posted byJohn Stepek
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Fears over the euro have sent gold spiking to new highs. But just how high could it go eventually? I've read a lot of interesting calculations recently. On Breakingviews, Martin Hutchinson suggests it could hit $5,000 an ounce or more. Based on consumer price inflation, he says, the $875 an ounce high seen in 1980 is equivalent to $2,400 an ounce today. But if you also consider the huge growth in the world's economic output since then (it's increased about six-fold), and "the gold price could top out at $5,300," says Hutchinson.
Meanwhile, our own Tim Price told readers of his Price Report newsletter last week that you could argue that gold was worth $9,500 an ounce. How? Take it away Tim…
"The partners at hedge fund group QB Asset Management conducted an analysis at the end of 2008 to try and assess the intrinsic value of gold in dollar terms, what they called 'The Shadow Gold Price'. They assumed that US Federal Reserve Bank liabilities were again exchangeable into gold and then divided the dollar amount of current Fed liabilities by official gold holdings. The results will probably surprise you.
"By dividing $2.5 trillion in FRB reserves by US official gold holdings of 8,100 metric tons, they came up with an "equilibrium" gold price of approximately $9,500 per ounce today. That is not their target price for gold necessarily, but it shows just how much potential there is for further gains in the spot gold price as expressed in US dollars."
Those prices might sound outlandish. But I think Tim's last point is the one to bear in mind – it's not so much a target price, as an indication of the potential for further gains. As Société Générale's Dylan Grice wrote in a similar report on gold, the point is that gold is a pretty tough object to value. It doesn't provide an income, now or in the future, which is the way you measure the value of most investments.
So as more and more people become interested in gold, the more likely we are to see increasingly bizarre valuation methods cropping up – such as the "eyeballs per page" measure and the like that used to come up when tech bubble analysts tried to value profitless dotcom stocks.
The point is that gold's bull run won't end when it hits a specific value. It will end when the central banks of the world finally decide that they need to hike interest rates and start protecting their currencies. As the actions of the European Central Bank so amply demonstrate, that doesn't look like happening in the foreseeable future. So you can expect to see gold hitting new highs again and again.
Dominic Frisby, our commodities correspondent, has more on the near-term outlook for gold in Money Morning tomorrow morning (sign up for it here - for free - if you haven't already).
* The Price Report is a regulated product issued by MoneyWeek Limited.
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Good thread. Interesting article in the Wall Street Journal:
Is Gold the Next Bubble?
http://online.wsj.com/article/SB10001424052748704792104575264863069565780.html
Great chart showing how gold has not gone parabolic and reached bubble levels yet:
Currently gold is being offered for sale to "the lowest common denominator of investor", but Joe Public hs not been buying gold. None of my colleagues of friends own gold, and I believe that the ownership of non-jewelry gold by the public in miniscule.I'm really not convinced - one of the comments to that article was very interesting, and I think valid;
"When a commodity is sold to the lowest common denominator of investor, it's time to start getting nervous."
The gold chart looks a lot different if you adjust it for inflation:Another issue is to look at the gold price from a longer term view, so here's a 36 year chart;
[broken link removed]
It's looking more like a bubble from the longer perspective.
Currently gold is being offered for sale to "the lowest common denominator of investor", but Joe Public hs not been buying gold. None of my colleagues of friends own gold, and I believe that the ownership of non-jewelry gold by the public in miniscule.
The gold chart looks a lot different if you adjust it for inflation:
[broken link removed]
http://inflationdata.com/inflation/images/charts/Gold/Gold_inflation_chart.htm
Yes it is above it's long term average, and has been for a while, but so has the increase in money supply throughout the world, which is what inflation is. The fact that the increased money supply hasn't yet resulted in huge increases in consumer prices is the main reason I believe gold still has a huge upward potential.The second chart clearly shows that gold is above its long term average, and the price has risen further since the chart ends in 2009.
Both charts still indicate that gold is currently overvalued. Bar the oil crises, it doesn't look like gold is a good long term investment, and certainly not at current prices.
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