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Wednesday, January 22, 2014

Gold's Fair Value Under $800?

Mark Hulbert reports that one model for gold suggests that its fair value is less than $800:
What factor or factors does Erb suggest that gold traders focus on? The one that he and his co-author Campbell Harvey suggested in their NBER study is the ratio of gold’s price to the level of the consumer price index. Since that ratio historically has averaged 3.4-to-1, a rule of thumb could be that gold is overvalued when the ratio is above that level and undervalued when below.

Currently, the gold-CPI ratio stands at 5.3-to-1, suggesting gold remains quite overvalued. That in turn suggests that gold’s fair value is just under $800 an ounce.