What's the "Fair Price" of Gold?

by Robert Williams

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.

Gold futures have passed $1,000/oz this weekSo 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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