Just how high could gold go?

Just how high the price of gold could go is a tough call to make. Because as more people become interested in the stuff, the more bizarre valuation methods we'll see.

Fears over the euro have sent gold spiking to new highs. But just how high could it go eventually? I've read a lot of interesting calculations recently. On Breakingviews, Martin Hutchinson suggests it could hit $5,000 an ounce or more. Based on consumer price inflation, he says, the $875 an ounce high seen in 1980 is equivalent to $2,400 an ounce today. But if you also consider the huge growth in the world's economic output since then (it's increased about six-fold), and "the gold price could top out at $5,300," says Hutchinson.

Meanwhile, our own Tim Price told readers of his Price Report newsletter last week that you could argue that gold was worth $9,500 an ounce. How? Take it away Tim

"The partners at hedge fund group QB Asset Management conducted an analysis at the end of 2008 to try and assess the intrinsic value of gold in dollar terms, what they called 'The Shadow Gold Price'. They assumed that US Federal Reserve Bank liabilities were again exchangeable into gold and then divided the dollar amount of current Fed liabilities by official gold holdings. The results will probably surprise you.

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"By dividing $2.5 trillion in FRB reserves by US official gold holdings of 8,100 metric tons, they came up with an "equilibrium" gold price of approximately $9,500 per ounce today. That is not their target price for gold necessarily, but it shows just how much potential there is for further gains in the spot gold price as expressed in US dollars."

Those prices might sound outlandish. But I think Tim's last point is the one to bear in mind it's not so much a target price, as an indication of the potential for further gains. As Socit Gnrale's Dylan Grice wrote in a similar report on gold, the point is that gold is a pretty tough object to value. It doesn't provide an income, now or in the future, which is the way you measure the value of most investments.

So as more and more people become interested in gold, the more likely we are to see increasingly bizarre valuation methods cropping up equivalent tothe "eyeballs per page" measure and the like that used to come up when tech bubble analysts tried to value profitless dotcom stocks.

The point is that gold's bull run won't end when it hits a specific value. It will end when the central banks of the world finally decide that they need to hike interest rates and start protecting their currencies. As the actions of the European Central Bank so amply demonstrate, that doesn't look like happening in the foreseeable future. So you can expect to see gold hitting new highs again and again.

Dominic Frisby, our commodities correspondent, has more on the near-term outlook for gold in Money Morning tomorrow morning (sign up for it here - for free - if you haven't already).

* The Price Report is a regulated product issued by MoneyWeek Limited.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.