What’s the “Fair Price” of Gold?
by Robert Williams, Investment U Contributor
Tuesday, September 29, 2009
The world’s been awaiting gold’s big push higher since Wall Street started unraveling over a year ago. Remember, gold is considered the foremost safe-haven investment during turbulent times because of its intrinsic value.
But since the Dow topped out in November 2007, gold has merely danced between $725/ounce and $1,000/ounce.
Last week, however, the yellow metal breached (and closed) above the $1,000/ounce level – thanks to the broad weakness in the U.S. dollar – for the first time in 18 months.
So that got me thinking. What’s a fair price for gold?
Consider this…
On the strength of the extraordinary inflation in the 1970s, gold traded for $800/ounce by 1980. At the time, the Dow sat at 800, which represented a 1-to-1 ratio. And the historical high point of gold.
By the late 1990s, the Dow was above 11,000, while gold languished around $300/ounce, representing a 44-to-1 ratio. And gold’s low point (since President Nixon took us off the gold standard in the 1970).
At present, the ratio is about 10-to-1.
When you consider the state of the economy, the weak dollar, the bailouts, the health of the U.S. banking system and the like, the 10-to-1 ratio seems awfully high.
Conservatively, I think this market can support a 7.5-to-1 ratio, which would put the price of gold around $1,300/ounce. But before you pull the trigger, Lee’s article reveals a brilliant way to own gold for cheap. While also getting paid to do it.
Ahead of the tape,
Robert Williams
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3 Responses to “What’s the “Fair Price” of Gold?”
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In addition to once being a full-time trader of equities and equity derivatives, Robert Williams has served as the lead financial analyst for a Forbes top-50 private corporation and an analyst for the endowment of a major academic institution. He's also been profiled in such books as Trade with Passion and Purpose and Alexander Green's The Secret of Shelter Island. 
I don’t understand how you think that the formula you’re following has value. If Dow was at 800, and the price of Gold was at $800, does it mean (theoretically) that the price of Gold can go crazy and reach $11000. I think a fair thing to do is to compare the price of Gold with how the dollar is performing.
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Per Robert Williams:
It does, in fact, mean exactly that! One would have thought that $800 gold in 1980 is just as preposterous as $11,000 gold is today.
Thank you,
Investment U
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But how long did that $800 price in 1980 last? Probably only for a few days. Within a few months of reaching that bubble peak, gold had already lost 50%, then eventually lost 75% from the peak. That was a bubble for gold just as it is today. There is no guarantee that the current gold bubble will reach the same height as it did in 1980. Those waiting for gold to hit $10000 may be sorely disappointed to see gold reaching a peak perhaps around $2000 and then the bubble pops and gold goes on to lose 75% to reach $500.
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