About a year ago, I mentioned our intermediate term technical target for Gold was $1,350. The spot price broke that yesterday intra-day, and next month’s futures already closed over that price. With that target met, let’s take a look at Gold and what the average investor should be doing with it.

From 2001-03, Alan Greenspan slashed rates to 1%. At that time, I wrote of impending inflation and a rise in commodities, especially Oil and Gold. This was right out of the macro playbook (i.e., not any great insight on my part). What was surprising was the dearth of sell side Commodity/Gold enthusiasm.

The first time I recommended Gold to the investing public was on CNBC’s Power Lunch, when I suggested having a position in the GLD ETF. This was about 5 years ago, and it was in the $40s. I still have that position, but I would be cutting it back by a third on the next major technical break in GLD.

We look at Gold and Precious metals as an asset class unto themselves. Holding a 5% position, especially from lower levels, provides diversification and a hedge against inflation.

When evaluating equities, one of the key metrics we use is Valuation. We can determine an approximate value based on earnings, dividend yield, discounted cash flow, etc.

That is not possible with Gold. People have tried to develop a model for the price of the precious metal (See Eddy’s attempt here), but it always is relative to something else — inflation, interest rates, Oil, Silver, etc. Indeed, an inability to objectively value Gold — other than what someone else is willing to pay for it — is why I am not enthusiastic about any more than a 5% position. With no objectively ability to value it, we are left with technicals, historical comparisons, and the Greater Fool theorem.

Let’s consider 3 different ways to contextualize the price of Gold: 1) Relative to the US Monetary Base; 2) Gold versus the SPX; and 3) On an Inflation adjusted basis. All three of these suggest Gold has more upside over the next few years. (Traders wanting to add should look for a pullback, rather than chasing momentum here).


1. Gold versus US Money Supply:  Looking at the price of Gold relative to the US Monetary base, Albert Edwards of SocGen drew the conclusion (December 2009) that Gold is cheap; even if you take a median around 0.60 (or even .40), it remains under-priced relative to US Money Supply — and that is before QE2:>

gold is cheap


2. Gold priced via SPX:  John Roque prefers to look at Gold relative to an asset class that has a valuation component. His chart of Gold Relative to S&P500 (1928-2010) suggests there is also upside to the metal:

click for larger chart

Thanks to John Roque, WJB Capital Group

3. Inflation Adjusted Gold: We do not inflation adjust stocks, as their price is typically a function of cash flow and earnings. Hence, a nominal $1 of earnings for $15 stock produces a P/E ratio of $15, regardless of past price splits. That’s why we do not need to adjust for inflation when looking at stock prices.

But with Gold, there are no earnings, no cash flow, and no price splits. The price of an ounce of Gold in 2010 is very different than the price in 1975. While many are all abuzz over Gold’s new highs, be aware that these are nominal, not real (inflation adjusted) highs.

If we were to adjust for inflation, Gold is nowhere near its all time peak — in real terms, its only about half its prior highs:


gold REAL dollars
courtesy of Bianco Research


All three of the above  metrics suggest Golds is not yet fully valued has not yet reached its highest potential price point. Slapping a $2,000 target is not unreasonable, and breaching its inflation adjusted target of $2,358 is also possible over the next few years.

So why do you sense some hesitancy on my part?

First, Gold fever has risen to the point of excess. The crowd always piles in at the top. The only thing missing from the recent enthusiasm is a Time magazine Gold cover. Even without it, Gold feels like a crowded trade setting up for at least a minor correction.

And, I see way too many investors who have drunk the Kool-Aid; they have turned their portfolios into a combination of Gold Futures, Miners, and ETFs. This is way too risky for individuals who may not have the trading discipline to honor their stop losses — i.e., cut & run when the momentum stutters. Lastly, this is a high beta momentum play. As we have seen as recently as yesterday (EQIX anyone?), when a volatile high beta name has a hiccup, it can get severely whacked.

As noted yesterday, participating in one asset class (Equities) does not preclude you from owning other asset classes.



I Love Gold (August 16th, 2010)

Fools Gold: Inside the Glenn Beck Goldline Scheme (July 28th, 2010)

Category: Gold & Precious Metals, Technical Analysis, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

37 Responses to “Gold Hits Our $1350 Target; Now What?”

  1. Ooh, I see a few edits that did not take. I will fix that when I get back to the office after this meeting.

  2. I would pare down some profits and wait for a pullback to reallocate or use those to rebalance a set portfolio if I were trading gold straight up like that (I hedge so I keep permanently in)

    I think that you should always have some as part of your permanent asset base and given the statements that come out of CBs these days the ‘alternate currency’ looks too much like good insurance at this point

  3. call me ahab says:

    all I know is the melt value of a silver quarter is $4


    BR: Then why aren’t you arbitraging quarters ?

  4. Robespierre says:

    I like gold at more than %5 of portfolio in this environment. If gold is still “cheap” when using monetary base then with worldwide QE2 in steroids it is about to get “cheaper”, though I think a QE of 1 trillion is probably priced in. I, too, have waiting for a pull back to add.

  5. wally says:

    I wouldn’t agree with your conclusion about the final chart (inflation-adjusted). Nothing in a chart like that proves cyclicity; the outlier high price may be simply that and if you disregard that one peak gold is now at the high end on that chart.

    In fact, the chartists assume they are looking at cycles in other charts, too… but what is the evidence of that?

  6. Super-Anon says:

    Seems like I was just looking at a bunch of Saint Gaudens double eagles for $1,350 a pop.

    I should have bought them all. =(

  7. Bruman says:

    Great stuff, as usual. Thanks for a reminder on various ways to get around the fact that there isn’t really a way to do a DCF for gold as you can with stocks, bonds, funds, and real estate.

    Those highs on the graphs look like they skew the distribution (or at least distorts how the eye sees it). The highs are never maintained long (presumably because bubble fever takes place at the end). I’d be inclined to look at the median price rather than the mean price for attacking this problem.

    On another point, I’m not sure I understand when you write: “All three of these suggest Gold has further to run; Traders should be looking for a pullback, rather than chasing momentum here.” When gold has further to run, aren’t you making a momentum argument? Obviously “buying more on pullbacks” is sensible in a “more to run” scenario, but if there is ever a time to chase momentum, I would think it would be in a “it has more to run” climate. Am I missing something? or is it simply never appropriate to chase momentum?

  8. IvoZ says:

    BR: “When evaluating equities, one of the key metrics we use is Valuation. We can determine an approximate value based on earnings, dividend yield, discounted cash flow”

    Well, I still do not understand what is so deterministic in these measures that makes it SOOOO much easier to determine “fair value” than with gold.

    Let’s see:
    1) Using earnings – hmmm then you have the P/E. Well what is the right one? It can be 7 or 27 (or 200 in NASDAQ). Of course you can use it relative to other stocks, but I see no great determinism here either.

    2) DY – here again: used to be bigger than bond yields, now lower. It can be cut (Citi anyone?). Ok here one can do some better suff with this metric.

    3) DCF: well here you are relative to risk free rate and assumed risk premium (or required return), which is not stable over time.

    And so finally, I can turn all this argument on its head and say that stocks are pieces of paper with highly uncertain and unstable speculative value (and vaue comes because people have decided that they have value, because things like promises will be honoured or there is a Greater Fool), whereas gold is a nice looking shiny metal, pretty good for jewelry or other stuff (teeth?) with some value that is tangible.

    When I hear someone say gold has no value, I immediately think this guy is over his head in finance and spends too much time in the Matrix.


    BR: Its a frame of reference for evaluating how cheap or expensive a stock is. Companies with 50 or 100 P/Es are pricey and need big growth to justify those prices;

    You don’t get that Frame of reference with Gold . . .

  9. AG Sage says:

    Super-Anon, funny, I was just looking at a roulette wheel that landed on red. Should have put all my money on red… ;-)

  10. call me ahab says:

    and what of gold plated tungsten-

    I wonder what the value of that is per ton

  11. Its not that “Gold has no value” — its that i know of no objective way to evaluate what that value is (other than what someone else is willing to pay for it)

  12. [...] now what?  (Big Picture also EconomPic [...]

  13. gms777 says:

    It’s all about fear.

    When the Great Seal of the Office of the President fell off of Pres. Obama’s lectern, that was his Gerald Ford falling down Air Force One moment, his Jimmy Carter collapsing while jogging moment.

    He needs to start doing some Vladimir Putin stuff and strangle some grizzly bears.

    Multiple categories of gold and silver coins are now sold out at Apmex.com.

    I’ll bet it rises somewhere between $1,400 and $1,450, in the absence of some horrible world event, then corrects to about $1,200 to $1,250, before making a move next spring to $1,500 to $1,750.

    Remember it was the onset of the Iran-Iraq War and the Soviet invasion of Afghanistan that contributed significantly to gold’s parabolic rise in 1979 and 1980…..Let’s hope those sorts of things don’t happen…

  14. I’d put allocation a lot higher than 5%. Somewhere between 10% – 20% would be wiser IMO. 15% if you’re not going to trade it

  15. Efficientish says:

    The big (huge, gaping) problem with these charts is that they include the 1980 gold bubble.

    The notion that gold is undervalued now because it is not as valuable as it was during the last bubble is insane.

    It would be like looking at a long-term chart of the housing market in 20 years and saying that housing prices could still run a lot higher because they are well below the relative highs set in 2007.

  16. dead hobo says:

    I’ve always avoided gold in the past because I didn’t understand it. Gold followed its own rhythms and didn’t correlate to anything consistently.

    Now, I think I see a pattern that might be useful.

    Today we have both currency debasement and a growing population. More people = more demand, holding everything else constant. Currency debasement = commodity inflation. As long as high uncertainty remains a general backdrop and central banks keep the paper flowing in abundance, I think buy and hold, assuming hold = a few months, is safe providing a good buy in point appears. To me, a good general dip will do. Maybe napkin charting is adequate. Only a general depression / deflation would ruin the price and the Fed is guaranteeing that won’t happen over the short run.

    What I don’t know is how to get in. I’m assuming gold miners are still a safe way in and out. I won’t own the physical and gold derivatives seem to be only a fiction that everyone agrees to be fooled by.

  17. ACS says:

    Any attempt to evaluate gold, especially on an historical basis, has to account for the fact that prior to 1933 it was directly linked to the Dollar and it behaved in a manner quite different than conventional wisdom today. Back then gold lost purchasing power during inflation and gained it during deflation just like the currency it was linked to. There was a hybrid gold to Dollar link between 1933 and 1971 when the final connection was ended. Since 1971 gold has generally behaved in the opposite manner, gaining value with inflation and losing value when deflation seemed possible. The 1980 peak may not represent a “normal” cycle peak in gold since it very well may have been driven by pent up demand developed during the long period when gold possession in the US was banned. In fact there are not enough cycles under free trading conditions to say what a normal cycle is.

  18. tt says:


    you are awesome and have a great blog. i respect you immensely.

    however you do not explain that gold was the trade of the decade.

    and also ackowledge that gold has a 100% record of destroying every paper currency since the beginning of recorded history. the current fiat regime is very long in the tooth. if 5000 years of a 100% record is insufficient for part of your discussion i wonder why.

    is it too frightening for most to comprehend. ask a confederate dollar holder in 1870 or a german mark holder or a japanese yen holder after war.

    i suggest that the mathematical impossibility of usa being able to pay on all liabilities promised is a hugely bullish sign that gold’s 5000 year record is a great place to have a significant amount of actual coins in ones hands. paper gold like gld is a gamble. even the london bullion market failed in stressful times.

    gold is forever. that is something wall street traders don’t understand. i grew up in a bond trading neighborhood of ny. and am a professional trader myself. the only guys on the street now that have gotten themselves educated on gold are the treasury traders and brokers at the top of the wall street pyramid.

    the equity traders have always been the dullest bunch. go with the brains. and 5k years of 100% record.


    BR: This post was about why it is challenging to value gold.

    There are lots of things I don’t explain in it: I don’t discuss innovations in non-invasive cardio surgery. I do not touch upon why men have a harder time expressing their feelings than women do. And I do not go into details as to why jet packs have not become ubiquitous.


  19. Alaric says:

    With commodities you should be looking at supply / demand characteristics as well as the overall size of the market. I the case of gold, supply comes in the form of mining output, central bank sales, and recycling.

    For example, mining output has been flat for some time. For now, new mines are incredibly hard to start, and over the longer term with human populations spreading out, there will be less new supply – unless there is a technological shift and we can sift gold from the sea, etc, which I do not see at this time. This has been bullish.

    Of course major supply also comes in the form of central bank selling and recycling. There is quite a bit of variability here of course, but you really need to get into the supply / demand details as well as the criteria you referred to…..

  20. Horatio says:

    You mean you don’t buy into the bullshit from every lunatic gold bug who starts his religious comment by blowing smoke up your ass?

    Good for you

  21. ashpelham2 says:

    Anyone with anything they could offer me, as far as advice goes, on owning both sides of the gold trade right now? I’d like to get into GLD to see if it really has some legs to the upside, but I’d also like to do something like GLL or DZZ, which are powershares short and double shorts. Obviously, the double short is nearly free at 9.00 right now, the regular short is around 33.00.

  22. beaufou says:

    Thanks BR, I inherited 50 ounces of the stuff a few years back and was starting to panic as to what to do with it.
    I guess I’ll keep it for a while longer.

  23. 57variety says:

    Um – that’s a bit USD centric, in GBP or EUR it doesn’t look anywhere near so vertiginous. Gold hasn’t quite (yet) reached the highs of May/June.


    BR: Actually, that statement is incorrect:

    Gold Priced in 6 Major Currencies (Sept 2010)

    Gold bullion surging in all currencies (November 2009)

  24. tt says:


    if one bought an ounce of gold in 1800 1900 1933 or 1973 or 1980 top, what value would the ounce gold have in purchase power in food, clothing, shelter and fun too.

    if one had bought 100 dollars in most stock market 100 biggest stocks in any country on planet at the same time, what would one have today. estate and beneficiaries included.

    for the average investor the obvious value difference is the difference between penury and wealth.

    go read the famous book about where are the customers yachts. forget the exact title.

    best gold book ever is peter bernstein’s power of gold. not a gold bug rant. reality of what it has done.

  25. @ ashpelham2

    No offense but you had better check the expiry date on that free lunch you are trying to consume

    Usually those short and double short vehicles don’t track the price exactly and you end up losing on both sides on a net basis. If they didn’t then the big money would have taken all the fun out of them long ago

  26. Darkness says:

    beaufou: Thanks BR, I inherited 50 ounces of the stuff a few years back and was starting to panic as to what to do with it.

    If I were you, I’d use it to buy a nice piece of farmland.

  27. ashpelham2 says:

    Yeah, I don’t think I”m quite educated enough to be comfortable buying something like an inverse index short. Hell, why not just buy puts on it? Hahahaha!!! That way, I could thoroughly confuse myself and, in the process, smoke my IRA into nothing!!

    Just watching GLL for example, today, a quote at 32.59 purchase. Around 32.41 as I write this. Gold is down on the day. Shouldn’t this inverse short be up for the day? Either in the money or near the money?

  28. 57variety says:

    Barry, I really hate to argue with you and will probably regret it, but as far as I can see from those charts gold has only reached new highs in CAD and USD, all others peaked in June-ish of this year, AUD peaked early last year . To other currencies we have already had a correction. And isn’t this really the point, gold is acting as an independent hard currency albeit one that people are only really interested in when things are getting a bit sticky out there.

    Agree about the farmland.

  29. mtlippincott says:

    I think part of the reason gold is hard to value is that it means different things to different people, it can be a commodity, precious metal, currency substitute, inflation hedge, trump’s favorite color, etc…so it’s hard to fit one model to it.

    I work at an advisory firm that invests in lots of types hedge funds and recently spoke with a commodity-oriented equity fund. One way they approached gold, as with other commodities, was to estimate the marginal cost of getting an ounce of gold out of the ground. Pretty basic economics I guess. From their knowledge (and they have a really good working knowledge of gold mines worldwide) they thought the price of gold made a ton of sense based on the marginal cost of production they were seeing from the firms they track (pretty much all of them).

    So feel free to take that for it’s worth.

  30. speaking of “Relative Valuation”..

    People may care to peruse this list http://www.lewrockwell.com/rep/top-100-items-to-disappear.html

    and, remember, this ‘graphic’ http://www.businessballs.com/maslow.htm


    at the EOD, ‘everything has its Limits, what are Yours?’

  31. Mike C says:

    In fact, the chartists assume they are looking at cycles in other charts, too… but what is the evidence of that?

    What is the evidence that you are NOT? I’ve seen this line of thought here often. One commenter loves to refer to “magic charts”.

    Here’s the thing though. Ultimately, you’ve got 2 choices. Either participate (buy and sell assets) or not participate (hold cash). The latter is a guarantee you won’t lose, but it is also a guarantee you’ll never make anything either. So once you decide to participate you have to have some basis for decisions, so if some chart appears to have some “cycle” the question becomes is it “real” or just something your mind is overlaying on top of randomness. Only God knows for sure, but either you’ll make money, lose money, or watch from the sidelines

  32. Mike C says:

    Obviously “buying more on pullbacks” is sensible in a “more to run” scenario, but if there is ever a time to chase momentum, I would think it would be in a “it has more to run” climate. Am I missing something? or is it simply never appropriate to chase momentum?

    Not sure why so many people appear to have such a difficulty distinguishing between different conclusions over different time frames. Obviously, in the short-term (weeks to a month or two) gold has tremendous momentum, hence not chasing momentum and waiting for a pullback. Over the long-term (2-5 years) it may still have plenty of room to run. In a secular bull, getting the entry exactly perfect isn’t that important. Even someone who bought the spring 06 top at 730 or March 2008 top at 1000 is doing OK today with gold at 1300. If we are going to 2000 or 3000 or even 5000 (Louise Yamada) then buying at 1350 or 1300 or 1250 is irrelevant. That said, I might try to play the short-term and sell some off here with the bearish engulfing candle today and look for a retest to the breakout

  33. Mike C says:


    Harry Browne’s “Permanent Portfolio” holds 25% in gold, and then 25% in cash, 25% in stocks, and 25% in bonds. Portfolio record since the 70s is admirable. So I think a 25% allocation is perfectly reasonable although you’d want to average in if you have waited this long to establish any gold exposure.

    It’s clear to me as another commenter pointed out is we basically have a stealth currency debasement. Stealth because based on what I’ve seen few people recognize it. The trade for the next 10 years is hold stocks and gold, no cash and no bonds. In 2020, the purchasing power of today’s cash and U.S Treasuries will have been mutilated.

  34. [...] Barry on gold's next target now that it's hit his 1350 bogey.  (TBP) [...]

  35. [...] Gold Hits Our $1350 Target; Now What? [...]

  36. tt says:

    barry said my comment was a fail, because i point out that gold was the trade of the decade. weird.

    gold has 100% track record for thousands of years of destroying every known paper currency.

    and he mocks me and talks about jet packs……………………..

    typical condescending crap, i usually don’t detect from this particular blog.

    question barry: do you give the same advice for free on your blog as you do for your paying clients? if you do, it seems silly.

    hint barry, if you are so boxed into your analytics. look at the cost of mining a mineral. tin or gold. see what the cost of production is compared to market price.

    gold shouldn’t be so difficult to price if you want to go that pedestrian way. why the mystery. you have been brainwashed for 3 generations of amerikans to think gold is for kooks. you have been suckered. go read some history, and catch up to the smart money.