HOW DO YOU VALUE GOLD?

 

We can tell that the stock market is historically overvalued by PE ratios, Price to Book ratios, Price to free cash flow ratios etc.

The PE of the SP is currently about 30 percent, while historical averages are closer to 18 percent.  That gives a useful valuation metric.

You can tell the value of a Credit Instrument by analyzing the quality of the debt to asset ratios of the balance sheets underlying the instruments.  Then you can guage whether the interest rates on offer are commensuate with the risks involved.

But how do you value gold?

Nobody has a decent formula for this type of valuation.

You can look at the balance sheet of the countries most in control of the global economy.  You can look at the total Debt inssuance of these countries.  You can track global liquidity flows which is the same a global debt flows.

And you can track - to some extent - Gold puchases by Central Banks, and by the investing public.

All of these are interesting inputs.  But then how do you guage the value of gold in realtion to these inputs?

That would tell you something if you could do it accurately - which would be very tough to do.

But Gold is ultimately a guage of the Stability of Global institutions.  Global politcal institutions, Global Legal institutions and Global Economic institutions.  And these are all all dependent right now, in our current era, on Debt.

There is no guage for this.

You can look at public confidence in the US congress for example which stands at 17 percent (an historical low.)  Or the Supreme court - 44 percent (near an historical low).

Again, that can't yeild any sort of metric for valuing gold.

HOWEVER - what you can do as an investor is to take an historical view of the era in which we live and guage for yourself whether overall Global Stability is rising or falling.

For example, in the Fourth Turning, Neil Howe argues that historical eras repeat and move from stability to instability and back again.  He argues we are in a fourth turning era which is the most unstable.  He, like many historians, liken our era to the era of the 1930's.

But you would need to read the argument to see if you agree.

Then in this broad context you can analyze - first and formost -  whether the leading global economies are built on stable Debt to Asset structures.  Because we live in an era wherein all economic activity is built on DEBT.  Units of account are units of Debt.  Dollars are instruments of Debt.  As are Euros and Rubles and Yen.  And Debt derivatives (economic activity in toto) are measured in the multi-quadrillions.  And most of this activity in unregulated.

If debt is careening out of control it is a certainty that stability is crumbling.  But what does out of control mean?  You have to decide that for yourself.

Then try to gauge the political will - and the poltical economic acumen - to tackle the Debt problem.  (if you agree there is a problem).

If that is truely high, stability could reassert itself.  If not, instability will increase.

I think the answer to these questions are most obvious.  So, to me, adding to my gold position at the current price (around $2600) is also obvious.  

But you have to come to these conclusions yourself and invest accordingly.

No ratios or valuation metrics will help.  And it you are American you are at a distinct disadvantage for gauging these things because the American standard of living is so much higher than anywhere else in the world.  It is only since the great financial crisis that American Standard of living has begun to deteriorate - as the US has made the decision that the taxpayer will always be on the hook for poor decision making by Banks, Shadow Banks, and corporations.  That decision in itself has destabilized the lifestyle of the average citizen in favor of preserving the wealth of the super rich.  But this is a recent developement and it will take time for Americans to realize that this is a one way bet on stability.

On top of this, the decision to allow the super rich to financialize all assets in a way that they are only available to the super rich ie through Private Equity and Private Credit is again massively destabilizing - but recent enough that few can see it.

In the end, it all comes down to common sense in a most personal sense in seeing and understanding trends that can only move in one direction until there is a Mass Will will to move another way.  But this must be preceded by a Mass Understanding which is difficult in an age where the super wealthy control the flow of information.

The only protection against these trends for the private citizen is Gold ownership.  Gold is the only asset with no Counter party risk.  Most every other country in the world sees that and is moving in that direction.  Eventually, as their lifestyle deteriorates,  the US citizens will see it too.

But if you are counting on the ratios or gauges supplied by anyone but yourself you'll go broke investing in gold because all investments are subject to short term volatility that will knock you out of your position.  The only thing that will save you from this - especially in gold where there are no reliable metrics - is your personal conviction of where the world is in the Stability to Instability spectrum.

And where it is heading.