Here's Why The Price Of Gold Is Not Too Low

To listen to a gold bull, you would think that no matter where gold is priced, it is a safe haven. Despite the copious evidence of history that says gold can go up and down, certain of the gold bulls believe that when “The Big One” hits, gold will be the most prized asset in the world.

The argument that gold is valuable simply because it is acceptable as money, and money that is not under control of a central bank, is vacuous. Lots of commodities are not under the control of a central bank. Moreover, like any other asset in the world gold can be expensive when it costs too much of other stuff to acquire it, and it can be cheap when it costs lots less to acquire.

I saw somewhere recently a chart that said “gold may be forming a major bottom,” which I thought was interesting because of some quantitative analysis that we do regularly (indeed, daily) on commodities.

I guess, for context, I should back up a little bit and show that chart from a longer-term perspective. From this angle, it doesn’t look quite like a “major bottom,” but maybe that’s just me.

Few years ago noticed that the starting real price of gold (that is, gold deflated by the price index) turned out to be strikingly predictive of the future real return of holding (physical) gold. This should not be terribly shocking – although it is hard to persuade equity investors today that the price at which they buy stocks may affect their future returns.

The vertical line represents the current price of gold (all historical gold prices are adjusted by the CPI relative to today’s CPI and the future 10-year real return calculated to derive this curve). It suggests that the future real return for gold over the next decade should be around -7% per annum. Now, that doesn’t mean the price of gold will fall – the real return could be this bad if gold prices have already adjusted for an inflationary future that now unfolds but leaves the gold price unaffected

Source: Investing.com

Trader Bozhidar Arabadzhiev

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