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?
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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.
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