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What’s the “Fair Price” of Gold?
by Robert Williams, Publisher
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 below reveals a brilliant way to own gold for cheap. While also getting paid to do it.
Ahead of the Tape,
Robert Williams
Publisher, Investment U
- Why the Gold Rally Has Some Feeling Cheated
- Bernanke Just Squashed the Gold Rally, Now What?
- Biotech Stocks: The Market’s Best Bargain Right Now…
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2 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 also served as the lead financial analyst for a Forbes top-50 private corporation and an analyst for the endowment of a major academic institution.
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September 29th, 2009 at 7:22 pm
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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admin Reply:
September 30th, 2009 at 3:06 pm
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.
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