over 3 years ago • 2 mins
One influential valuation model suggests gold is currently 25% overpriced – but the precious metal nevertheless looks well positioned to make further gains 🔑
Gold’s per-ounce price passed $2,000 this week; it’s risen 15% in the past month, fueled by fears for the future of the US – and therefore the global – economy. But the fact it pays no income makes this investment particularly difficult to assign a “fair value”.
Comparisons can help illuminate whether gold looks expensive or not. The metal’s price relative to that of a barrel of oil, for example, remains near its highest in history – even after the latter’s recovery from April’s crash. The declining value of the US dollar, meanwhile, can’t account for all gold’s shininess; gold's price also sets records when measured in other major currencies.
Investors – rightly or wrongly – see gold as a store of value that can hedge against rising inflation. But even the recent pickup in inflation expectations fails to justify the metal’s all-time highs. Probably the most important influence is related, however: the real yields available on bonds. When 10-year US Treasuries effectively offer investors negative returns, gold’s own non-income-paying nature is no longer such a turn-off… 🤷♂️
One means of calculating a fair value for gold involves combining such yields – 20-year expected real interest rates, to be precise – with current inflation data and a few other factors. And crunching those numbers reveals gold’s present price to be around 24% too high.
While expensive, however, that “premium” to fair value is still well below its 2011 peak. Investor momentum could therefore push prices higher, especially if smaller retail investors pile in in earnest. And that doesn’t seem to have happened yet; exchange-traded funds’ (ETFs’) gold-buying activity, while high, nevertheless represents a lower share of total gold demand than it did in 2011.
Speculation aside, gold’s fair value will continue to rise if central banks carry on their current course and reduce real yields further. Predictions of $3,000 may be over-optimistic so long as inflation remains subdued (and investors calm); but while the likes of the US Federal Reserve keep propping up the financial system, the price of gold is likely to remain high 🧐
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