Long Position on Silver and Gold?

[Firehaus]

Why gold is only worth $800 an ounce

The gold bugs are stirring.

A 10 percent gain by the yellow metal this year is rekindling hope among long-suffering bulls that the major bear market that began nearly three years ago finally might be over.

They argue that gold will continue to rise because investors will be seeking a hedge against rising inflation, currency fluctuations and geopolitical uncertainty.

Yet according to Duke University finance professor Campbell Harvey, one of academia's leading experts on gold prices, the odds are poor that the metal will return any time soon to its all-time high in August 2011. That month, the spot Comex gold contract reached an intraday high of $1,929.20, more than $600 above Thursday’s settle price of $1,320.40.

He puts gold’s fair value today at a little higher than $800.

A valuation model Harvey proposed in a National Bureau of Economic Research study 18 months ago, when gold was nearly $1,700 an ounce, correctly foresaw that the metal was overvalued.

That model is based on the tendency for gold to decline whenever the ratio of its price to the consumer-price index rises well above its average level of about 3.4, and to rise when it is significantly below that average. With the CPI now at 237.1, this ratio stands at 5.6.

To be sure, Harvey acknowledges, gold is perfectly capable of taking a long time to return to its fair value -- and by no means will the path it takes be a straight line. So a near-term rally isn’t out of the question.

There is a shorter-term factor that nevertheless leads him to doubt gold can mount even a short-term rally that is very significant: rising Treasury yields, which go up as bond prices fall.

Over the past decade, Harvey points out, gold's price has been quick to respond to changes in Treasury yields -- rising as yields fall, and vice versa. If you believe that yields will on average be higher in coming months than where they are today, as he does, then "gold will most likely decline" over the shorter term.

Shouldn't inflation be taken into account in predicting gold's performance? After all, gold is widely considered to be one of the best inflation hedges.

But gold's track record as an inflation hedge depends greatly on your time horizon, according to Claude Erb, Harvey’s co-author on the National Bureau of Economic Research study and a former commodities and fixed-income manager at mutual-fund firm TCW Group.

Over the short term, he says, gold is a very unreliable inflation hedge. It is only over the long term that it can be a decent hedge -- and he emphasizes that this long term must be measured over many decades at a minimum.

Based on the markets' recent behavior, Erb is confident that if inflation and Treasury yields were both to rise over the next couple of years, the most likely outcome still would be a lower gold price...

http://t.money.msn.com/top-stocks/wh...ar800-an-ounce


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[MrPrena]

Good article.
CPI/PPI is one way. Another way to find the fair market value of precious metal is the MS and velocity of money ,M1,2,3 as well. (Sorry to apply Keynesian crap here).
My estimates on short run Au price is higher than $800, because of rates and not much tapering of increase change in MS. I think Bonds will be the first ones to see the curve when we actually have rate hike.
People thought I was on crack when I said around 3Q 2008 that Crude Oil's fair market price is about 85/barrel. At that time, it was $140ish. It sure dropped lower than 85ish year later.

I also believe that the ^DJI, ^GSPC and ^IXIC (not too sure on ixic) will see a significant decline around 2-3Q2015 to 1Q2016.

Why gold is only worth $800 an ounce

The gold bugs are stirring.

A 10 percent gain by the yellow metal this year is rekindling hope among long-suffering bulls that the major bear market that began nearly three years ago finally might be over.

They argue that gold will continue to rise because investors will be seeking a hedge against rising inflation, currency fluctuations and geopolitical uncertainty.

Yet according to Duke University finance professor Campbell Harvey, one of academia's leading experts on gold prices, the odds are poor that the metal will return any time soon to its all-time high in August 2011. That month, the spot Comex gold contract reached an intraday high of $1,929.20, more than $600 above Thursday’s settle price of $1,320.40.

He puts gold’s fair value today at a little higher than $800.

A valuation model Harvey proposed in a National Bureau of Economic Research study 18 months ago, when gold was nearly $1,700 an ounce, correctly foresaw that the metal was overvalued.

That model is based on the tendency for gold to decline whenever the ratio of its price to the consumer-price index rises well above its average level of about 3.4, and to rise when it is significantly below that average. With the CPI now at 237.1, this ratio stands at 5.6.

To be sure, Harvey acknowledges, gold is perfectly capable of taking a long time to return to its fair value -- and by no means will the path it takes be a straight line. So a near-term rally isn’t out of the question.

There is a shorter-term factor that nevertheless leads him to doubt gold can mount even a short-term rally that is very significant: rising Treasury yields, which go up as bond prices fall.

Over the past decade, Harvey points out, gold's price has been quick to respond to changes in Treasury yields -- rising as yields fall, and vice versa. If you believe that yields will on average be higher in coming months than where they are today, as he does, then "gold will most likely decline" over the shorter term.

Shouldn't inflation be taken into account in predicting gold's performance? After all, gold is widely considered to be one of the best inflation hedges.

But gold's track record as an inflation hedge depends greatly on your time horizon, according to Claude Erb, Harvey’s co-author on the National Bureau of Economic Research study and a former commodities and fixed-income manager at mutual-fund firm TCW Group.

Over the short term, he says, gold is a very unreliable inflation hedge. It is only over the long term that it can be a decent hedge -- and he emphasizes that this long term must be measured over many decades at a minimum.

Based on the markets' recent behavior, Erb is confident that if inflation and Treasury yields were both to rise over the next couple of years, the most likely outcome still would be a lower gold price...

http://t.money.msn.com/top-stocks/wh...ar800-an-ounce


Sent from my iPhone using Tapatalk