Friday, June 28, 2013

Gold Prices: Look Out Below

I haven't written about gold for some time, but its precipitous fall in price recently merits a mention.

When I last visited the subject in April 2013, gold had already moved sharply lower from the $1,875 per oz. that it reached in September 2011.  However, as the chart above clearly indicates, we continue to ratchet lower.

Here's what I wrote in April:

Although I believe I understand the gold bugs' position, I still believe that gold comes up short as a long-term asset class for most investors.

Gold has no practical uses, for one - its value lies solely in the eye of the beholder.  You can't take your gold bar to the grocery store, or to buy real estate, unless the seller is willing to accept it as payment.  Gold offers investors no dividends, so other than the psychic pleasure that one might derive from caressing a gold bar there is little appeal.

Stocks of viable companies, on the other hand, at least give investors the hope of increasing their wealth as companies grow.  I don't know what the world will look like in 10 years, but odds are pretty high that the world's economies will continue to grow, as they have done for the past few centuries.

So how low could gold prices go?

Today's "Alphaville" blog in the Financial Times carries a mention of some research done by Campbell Harvey of Duke University.  Professor Harvey's work suggests that gold remains overvalued, and that fair value for gold will be found around $800, or another -33% lower.

Here's an excerpt:

But on the subject of gold bottoms, some bottom talk is more compelling than others. Campbell Harvey, from Duke University, for example, has been arguing for a while that in real terms the gold price has been overvalued for some time.

So, on the basis that gold really is the inflation hedge some people think it is, its value should currently more about the … $800 mark

And here's the link to Harvey's paper:

In short, it would seem that it is too early to say that gold has reached any sort of near-term bottom.