UBS: Gold - The Ultimate Currency
This is a very nice investment research paper by UBS, covering these topics: 1) Gold is more than meets the eye, 2) The market for gold, 3) Is gold really expensive? The question of valuation. 4) Investment outlook. I especially liked their section on the valuation of gold, similar to other articles I have previously posted. As Bill Fleckenstein points out, gold is very difficult to value to begin with: Bill Fleckenstein Interview - http://caps.fool.com/Blogs/bill-fleckenstein-interview/40....... But I lay out a few ways in which gold can be (IMO) reasonably valued: Update on the Dow/Gold Ratio and a few more Gold Ratios and ContraryInvestor: The Many Faces Of Gold - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=400090
Here is a short excerpt from the introduction
Most people – analysts and investors – view gold as a commodity.
They try to understand its price movements in the
same way they look at those of copper or nickel. While
it cannot be said that this approach is wrong, we believe
gold is more than a commodity. Gold is money – a very
special form of money.
It is gold’s monetary function that drives its prices beyond
its relative value as a commodity. Gold’s monetary aspect is
particularly appealing during periods of economic strife,
especially when trust in paper money wavers. Indeed, the
sharp rise in the price of gold in recent years can largely be
attributed to its status as a safe-haven currency.
Like any other currency, gold actually has many prices.
Thus, saying that gold is too expensive in USD terms is the
same as saying that the USD is too cheap in terms of gold.
Against a broad basket of all major currencies, we note
that gold’s value has remained remarkably stable over long
periods of time.
The gold market
About 166,000 tons of gold are held above ground today
and since the metal is virtually indestructible and is never
really consumed, there is no risk that we might run out of
gold the way that we may run out of oil or other raw
materials. Nevertheless, since much of the gold stock is
unavailable to the gold market, the annual shifts in supply
and demand heavily influence the metal’s price outlook.
Mining produces most of the world’s “new” gold, but
mines are capital-intensive and slow to respond to price
changes. Scrap gold is another source of supply, as are central
bank sales. Jewelry and investment are the main
sources of demand. Investment demand has risen rapidly in
recent years, reflecting investors’ concerns over the sustainability
of paper money systems. Central banks, which
reduced their gold reserves during the 1990s, are now
maintaining or even rebuilding their gold reserves. We
believe that the growing importance of investment
demand is likely to make the gold price more volatile in
Is gold really expensive?
Applying a valuation to gold is tricky. There is no absolute,
independent measure that determines when gold is cheap,
expensive or fairly valued. However, we believe that the
parameters we discuss in this report offer reasonable guidance
on gold’s valuation. Our investigation into production
costs convinces us that gold is certainly not cheap anymore.
At the same time, compared to other assets, we find
that gold is also not extremely expensive either. Indeed,
compared to oil or stocks, gold appears to be at least fairly
valued if not inexpensive.
Our longer-term inflation-adjusted gold price outlook
reflects this view. Our price model, which relates gold’s
price to the quantities of gold and money, indicates that a
significant share of gold’s higher prices mirrors the expansion
in the supply of US dollars in recent years. Our gold
model also indicates that concerns over the future of major
monetary systems are becoming visible in the price of gold.
Also on page 24 is a very nice discussion of several different ways to invest in gold. And as someone who like to spread risk, I really appreciated and agreed with this discussion.
Here is the paper: UBS GOLD RESEARCH FOCUS