Will Gold Go to $6,300?

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That is the gold valuation iconoclastic Societe Generale analyst Dylan Grice proposes in a recent issue of his regular client note, Popular Delusions. Surely, if he is correct, it's time to take a seat next to central banks -- who look set to be net purchasers of gold in the second half of 2009 for the first time since 1988 -- and ride this train for a potential quintupling in price.

Where does that number come from?
Grice didn't pluck $6,300 out of thin air -- the figure is based on the assumption of a Fed monetary base (approximately $1.7 trillion) that is 100% backed by U.S. gold reserves (263 million troy ounces), as opposed to being just 15% backed as it is at present. Could this happen? It certainly could, especially considering that it occurred in the 1970s, in a political/economic environment that bears some striking similarities to the present (in fact, peak gold prices during that period implied the dollar was "over-backed" to the tune of 140%).

Nevertheless, Grice compares his own "valuation" to those relic metrics of the dot-com mania -- market value per clicks/eyeballs/etc. -- and suggests that we could be in an early phase of a gold bubble. We've certainly witnessed increased interest in the metal this year, with gold outpacing stocks, along with many gold mining shares (not to mention another precious metal and historic hard currency -- silver; the iShares Silver Trust (NYSE: SLV  ) has gained 64% year-to-date):


% Year-to-Date Price Return
(at Nov. 30, 2009)

Yamana Gold (NYSE: AUY  )


SPDR Gold Shares ETF (NYSE: GLD  )


Newmont Mining (NYSE: NEM  )


Agnico-Eagle Mines (NYSE: AEM  )


Kinross Gold (NYSE: KGC  )


S&P 500 Price Return


Source: Capital IQ, a division of Standard & Poor's and Yahoo! Finance.

Gold is a (good) speculation; prefer dividend and international stocks as a hedge
I've been giving a lot of thought to gold recently, and Grice's analysis was a useful reminder that I remain incapable of valuing the yellow metal; as such, I'm backing away from my earlier view that it is a good hedge for inflation/dollar risk and classifying it as a speculation -- albeit an excellent one. Instead, I believe that high-quality dividend stocks and well-priced international stocks are better alternatives for individual investors seeking to hedge these looming risks.

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Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. The Fool owns shares of iShares Silver and has written a strangle on the position. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (16)

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  • Report this Comment On December 02, 2009, at 10:58 AM, sofpan wrote:

    For as long the Debt of all goverments-nations in the world is increasing, in an effort to fight this global depression, Gold will keep rising as a hedge for the declining value of global currencies because of the increasing supply volume (= money printing) and increasing Debt.

    Now, if you can imagine, Debt of many nations globally, is formating an ascent spiral, that is very difficult to fight it and reduce it. The easy "solution" = print new dollars, new money.

    Nowadays money is Debt.

    Gold by its ascent, is only conserve its value as a percentage to total global Debt.

    So, Gold is not a bubble. Bubble is the increasing Debt because it's making money out of thin air.

    Gold is solid rock, precious metal from the early years of human history.

    So yes... Gold is bull but not a bubble.

    ... and Gold is the more secure hedge for economic system collapse, no matter if we have inflation or deflation.

  • Report this Comment On January 28, 2010, at 7:49 PM, XMFSinchiruna wrote:

    Hi Alex,

    I always enjoy your gold pieces, but I have to respectfully disagree with any reclassification of gold as a speculative investment or asset class.

    Scrutinizing our financial system as I exhaustively as I know you have, you'll agree objectively that true speculation remains that which is built upon the $600 trillion global derivatives market and the currency(ies) upon which that now sits ... reflated and virtually ignored as if it had never been the cause of our near-collapse. Do we agree?

    True speculation is an investment in bank stocks when the nature of remaining exposure to derivatives is unknowable. How does one value a bank stock under these circumstances? I submit that one can not.

    Objectively, I trust you'll also agree, the finite character of demand for U.S. Treasury debt contrasted against the wanton expansion of projected deficits presents an untenable condition for the U.S. dollar's purchasing power. Gold is less speculative, therefore, than the United States dollar.

    Speculation is rampant today, which is why I consider expectations of a double dip in equities more than mere idle speculation. I might not be able to get 2 learned gold experts to agree on a precise price target, but there's a broad community of investors that anticipates a substantial continuation of the multi-year bull market based upon qualitative analysis of an observable set of fiscal imbalances.

    Finally, as you know, gold doesn't have to hit $6,300 (nor silver $150) to play an important role in safeguarding family assets or seeking quality investments through relevant equities. Efforts to establish precise price targets are, admittedly, an exercise in speculation. However, one can value mining equities to the prevailing market conditions within a secular bull market, safe in the knowledge that prices will continue higher over the long-term until the expanding structural imbalances in the U.S. dollar are sustainably reversed.

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