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I’m not a perma-bull on gold, and I invest in a variety of asset classes depending on where value is in the market.
For example, I sold my gold and silver coin collection at high levels in 2011 because there was so much enthusiasm in the space and started buying back in 2018 with a long-term bullish outlook when gold touched $1,200. After an initial large investment in 2018, I’ve been dollar-cost averaging into gold and golds stocks over the past year.
Although we may have pullbacks along the way, and gold may retest its previous resistance level in the high $1,300’s as support at some point, my base case is for gold to reach or at least test new all-time highs in dollar terms as the rest of this business cycle plays out into the early half of the 2020’s decade.
How I Value Gold
Gold is challenging to value because it doesn’t produce cash flows, so discounted cash flow analysis and other valuation methods are out the window. I treat it as a currency, but I cannot use most of the same metrics that I value other currencies with (such as foreign-exchange reserve levels, current account balances, purchasing power parity vs exchange rates, and so forth).
Therefore, I use a combination of two primary methods to value gold, along with a set of secondary metrics for confirmation.
Valuation Method One: Gold vs Money Supply
For the first method, I track the price of gold relative to the growth of U.S. broad money supply per capita over the long run. According to the World Gold Council, there have likely been about 190,000 metric tons mined in human history, and most should still be around. This comes out to approximately 6.7 billion ounces, which is slightly less than one ounce per person in the world. This is a very rough estimate and the exact number is not important.
Gold production increases the total estimated gold supply by 1-1.5% per year, which is roughly in line with human population growth. So, the amount of gold per person stays relatively stable over time, and new gold production gets increasingly more expensive as easy deposits are mined out. In contrast, the number of U.S. dollars per person increases substantially over time, so we would expect to see dollars devalue relative to gold over the long-term at a pace roughly equal to that differential.
This chart, for example, shows the per-capita broad money supply of the United States (blue line) relative to the price of an ounce of gold (red line), indexed to 100 in 1973:
