Wednesday, 3 July 2013

Gold’s undervaluation is extreme

By Alasdair Macleod

The price of gold fell last week to the $1,200 level. The lemming sentiment in capital markets is uniformly bearish, yet every price-drop brings forth hungry buyers for physical gold from all over the world. Even hard-bitten gold bugs in the West are shaken and frightened to call a bottom, yet it is these conditions that accompany a selling climax. This article concludes there is a high possibility that gold will go sharply higher from here.

There are three loose ends to consider: valuation, economic and market fundamentals.

So far as I am aware nearly everyone is overlooking the obvious. You cannot consider the value of gold without taking account of the changes in the quantities of the currency and the above-ground stock of gold over time. The chart above [click link below] shows the adjusted US dollar price of gold rebased to 100 in January 2005 when the gold price was $422. In 2005 dollars, using True Money Supply plus excess reserves as the currency adjustment, gold has risen only 13.9% to an equivalent price of $481.

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