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
| Company |
% Year-to-Date Price Return
|
|---|---|
|
Yamana Gold |
74% |
|
SPDR Gold Shares ETF |
35% |
|
Newmont Mining |
34% |
|
Agnico-Eagle Mines |
22% |
|
Kinross Gold |
10% |
|
S&P 500 Price Return |
21% |
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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