The price of gold topped $1,590 (U.S.) on Friday. Is that too high, or too low? Given the underlying fundamentals I think it is still way too low. Here are some interesting facts about the current "valuation" of gold and gold mining stocks. * In inflation-adjusted dollars, gold is still well off its high reached in 1980. In nominal dollars the price of gold got to $840 an ounce which is the equivalent of $2,400 today. There was a high inflationary environment then with double-digit inflation in the US and many other economies both developed and emerging. * The ratio of the price of an ounce of gold to a barrel of Brent crude oil is just 13.5 today. In 1970 it was 16. If you apply a 16 multiple to today's $117 price for oil, you get a gold target of $1,870. At times, the ratio has ranged between 25 and 30, implying a valuation of $3,000 or more. * The gold to silver ratio has historically, going back a few hundred years, averaged about 16:1. So if history is anything to go by, with gold at $1600 an ounce silver's "fair" valuation is $100 an ounce. In 1980, Gold and Gold Stocks were 2.5% of all Global liquid assets and that was a bubble. Today they are less than 1%. To catch up with 1980, $4.5 trillion of gold needs to be produced (40 years of mine supply) or the price needs to go much higher, which means we are along way off from the next bubble. * The majors gold mining stocks are currently selling at only 8-10 times 2012 expected cash flow - very conservative cash flow multiples for any industry sector and not materially different from the Dow Jones Industrial and certainly not indicative of excessive overvaluation by any stretch of a rational valuation. * Mine supply versus money creation annually is about 1 to 25. Considering a lot of that gold goes into jewellery, the ratio of investment gold (bullion jewellery, bars, coins) is easily 1 to 50. This means, as an alternative investment or money substitute, the ratio is saying too much new money not enough new gold. Now what is likely to power the price of gold higher, or inversely the value of paper currencies lower? Well in essence it will be the ultimate fall-out, or price to pay, for all the money printing that has occurred since the end of 2008. Over the course of the last couple of years the world monetary base has been increased on a scale not seen in modern history. It is rather scary to think that there is no precedent from history for which we can gauge what might happen because since 2008 history has been written with respect to all the money printing that has occurred. If that isn't enough to comprehend developed market annual budget deficits as a % of GDP suggests even more money to be created over the coming months. I think the underlying fundamentals are in place to push gold to new highs in real terms (+$2400) over the coming months (perhaps weeks). Accordingly, one should position for a coming investment bubble in gold and gold stocks that will rival the TMT.com bubble of 1999/2000!
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