Is gold undervalued or overvalued ? The question is all the more relevant now that the precious metal is trading at $1,200 an ounce, having shed $700, or 38%, over the past two years, including nearly 14% during June alone. So how should you decide where gold is in its long-term cycle ? As a rule of thumb, I urge investors to calculate a ratio of gold’s price to the level of the consumer-price index. This ratio’s historical average has been about 3.4 to 1, so it is a good bet that gold is overvalued whenever the ratio is well above that level. When gold hit its high over $1,900 an ounce in September 2011, for example, the ratio was more than 8 to 1. In January 1980, the ratio stood at more than 11 to 1. Unfortunately for the gold bugs, the current gold/CPI ratio — 5.3 to 1 — is still above average, even in the wake of gold’s plunge over the past three months. To be in line with that average, gold would have to trade for $780 an ounce. Note carefully, My research doesn’t provide a basis for predicting when gold will once again trade at fair value, however — only that it will eventually do so.
Posted on: Sat, 29 Jun 2013 08:01:03 +0000
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