Is Gold Cheap or Expensive? Look to China and India

Click to enlarge:

Source: Bloomberg
Is Gold cheap? Pricey? Somewhere in between?

I have a hard time answering that question because I have no frame of reference. With equities, I could look at earnings and/or dividends, sales, book value, etc. to determine relative valuation. With bonds, interest rate, credit rating (and whether its callable) give me some insight into the value.

I have none of that with gold. (Note valuation doesn’t tell me whether to buy it or not, only whether its cheap or dear).

Bloomberg’s David Wilson looks at another standard to value gold: The historical standards for the world’s two largest buyers, China and India. Today, the price of gold for immediate delivery has risen to records in the Chinese renminbi and Indian rupee after accounting for each country’s inflation. (The caveat is gold is priced in dollars).

Wilson references a recent study by Claude B. Erb and Campbell R. Harvey of Gold Prices and valuation:

“Gold objects have existed for thousands of years but gold has only been an actively traded object since 1975. Gold has often been described as an inflation hedge. If gold is an inflation hedge then on average its real return should be zero. Yet over 1, 5, 10, 15 and 20 year investment horizons the variation in the nominal and real returns of gold has not been driven by realized inflation.

The real price of gold is currently high compared to history. In the past, when the real price of gold was above average, subsequent real gold returns have been below average. As a result investors in gold face a daunting dilemma: 1) seek inflation protection by paying a high real gold price that almost guarantees a decline in future purchasing power or 2) avoid gold and run the risk of a decline in future purchasing power if inflation surges.”

Fascinating stuff . . .


by David Wilson
September 20, 2012

The Golden Dilemma
Claude B. Erb, Campbell R. Harvey
Duke University Fuqua School of Business/National Bureau of Economic Research (NBER) Revised August 3, 2012

This post was originally published at The Big Picture and is reproduced here with permission.

2 Responses to "Is Gold Cheap or Expensive? Look to China and India"

  1. Bill Ain   September 25, 2012 at 8:21 am

    Your task is indeed a difficult one in the brave new world of "Create as much money as you like, it's OK". If it can hold true that limitless quantities may be produced without consequence then we need to find some new vocabulary with which to describe money-related phenomena; including the price of gold.
    If there were only three grains of sand on earth, then sand might somehow be a fabulously valuable commodity. As the supply is virtually limitless, it is nearly worthless.
    Why would this not be the case for money? The supply of ink and paper is virtually limitless.
    The point is that if there is a brave new world of money creation then there will be a concomitant brave new world of defining stores of value. Looking for historical perspective to find a neat statistical compartment is, in this case, like asking how many archer's arrows equal an atomic bomb. The world has apparently moved on.

  2. Devasa   October 8, 2012 at 8:03 am

    All monetary products are created by Wall street for the benefit of Wall street. Zero sum game where everybody loses and Wall street gets bonuses.
    Metal prices can be distorted by speculators but not controlled as billions exert their influence on the market. They have staying power also.