The problem with gold is that it really isn't possible to value it in a particularly technical way. As Jim Grant points out, pretty much the only way to make sense of the gold price is to look at its value as being "1/n, where 'n' is the world's confidence in paper currencies and the mandarins who manipulate them." The problem? No one knows what 'n' is.
Edward Chancellor has a stab at valuing gold with reference to a few other things. He looks at it relative to its price of extraction (around $600 an ounce); to the price of bread; to the price of oil; and to the price of a good suit (over many hundreds of years, a good bespoke suit has generally cost the equivalent of one ounce of gold). On most measures it comes out as over-valued by 40% relative to the price of bread, and by 9% to the price of oil for example. All in all, Chancellor ends up reckoning that an ounce of gold should be worth less than $1,000 rather than the $1,400 it is currently knocking around.
Is he right?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
He might be. But it isn't just the gold price coming down that would bring the gold/oil, gold/suit and gold/bread ratios back into line. The same would happen if the prices of oil, bread and good tweed rise. Which they are doing.
And regardless of what other measures you look at in the end, there isn't much you can do except for come back to 'n'. We don't know what 'n' is, but surely with quantitative easing continuing and the risks of a sovereign debt crisis anywhere from Spain to Japan and the US on the rise, it is surely more likely to be getting smaller, not bigger.
-
Water companies blocked from using customer money to pay “undeserved” bonusesThe regulator has blocked three water companies from using billpayer money to pay £1.5 million in exec bonuses
-
Will the Bitcoin price hit $100,000?With Bitcoin prices trading just below $100,000, we explore whether the cryptocurrency can hit the milestone.
-
House prices to crash? Your house may still be making you money, but not for much longerOpinion If you’re relying on your property to fund your pension, you may have to think again. But, says Merryn Somerset Webb, if house prices start to fall there may be a silver lining.
-
Prepare your portfolio for recessionOpinion A recession is looking increasingly likely. Add in a bear market and soaring inflation, and things are going to get very complicated for investors, says Merryn Somerset Webb.
-
Investing for income? Here are six investment trusts to buy nowOpinion For many savers and investors, income is getting hard to find. But it's not impossible to find, says Merryn Somerset Webb. Here, she picks six investment trusts that are currently yielding more than 4%.
-
Stories are great – but investors should stick to realityOpinion Everybody loves a story – and investors are no exception. But it’s easy to get carried away, says Merryn Somerset Webb, and forget the underlying truth of the market.
-
Everything is collapsing at once – here’s what to do about itOpinion Equity and bond markets are crashing, while inflation destroys the value of cash. Merryn Somerset Webb looks at where investors can turn to protect their wealth.
-
Value is starting to emerge in the marketsOpinion If you are looking for long-term value in the markets, some is beginning to emerge, says Merryn Somerset Webb. Indeed, you may soon be able to buy traditionally expensive growth stocks on the cheap, too.
-
ESG investing could end up being a classic mistakeOpinion ESG investing has been embraced with enormous speed and zeal. But think long and hard before buying in, says Merryn Somerset Webb.
-
UK house prices will fall – but not for a few yearsOpinion UK house prices look out of reach for many. But the truth is that British property is surprisingly affordable, says Merryn Somerset Webb. Prices will fall at some point – but not yet.
