With the gold price trading up 9.5% this month, gold mining stocks higher by 20.3%, and the price of gold now higher 12 of the last 13 days as measured by COMEX gold futures, discussion of a gold bubble is beginning to make its way through the marketplace. Tad Brooks of China Mineral Company recently discussed the gold market bubble and the appropriate price level for the bullion.
It has always been a contentious issue what the true value of gold is and how to measure what its price level should be. Brooks explained that, “One way to value gold is to ask at what gold price the value of outstanding central bank paper would be completely backed by gold. The US owns nearly 263 million troy ounces of gold (the world’s biggest holder) while the Fed’s monetary base is $1.7 trillion. So the price of gold at which the US dollars would be fully gold-backed is currently around $6,300.”
Using this formula to compare gold reserves to U.S. monetary base levels, Brooks charts a ratio showing gold-to-monetary base over the last 40 years, and the results are somewhat surprising. Far from being overvalued, the gold price when analyzed from the standpoint of the Fed’s monetary base looks to be extremely undervalued. And concerns over bubble prices comparable to the 70's and 80's are uunsubstantiatied when adjusted for inflation or for the monetary base. The 1980 high prints in the gold price would equate to $2,350 and $8,820 per ounce, respectively - highlighting the fact that talk of a gold bubble on the order that took place three decades ago is sheer nonsense.
