Presenting A Scientific Theory For The Fair Value Of Gold (With 88% Accuracy)

Tyler Durden's picture

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Gold...Bitches's picture

'fair value' is much higher going forward.

pslater's picture

Ignore a 92% correlation at your own peril.......your conclusion of 'fair value' suggests a collapse of other assets - which I agree with!

Anonymous's picture

How about a paper on what a dollar is worth?
What is the difference between a $1 bill and $100 bill? Extra ink?
Does Fed even know how many dollars exist?

Anonymous's picture

It comes down to trust.

If you don't trust Mugabe and his fellow crooks, a trillion Zimbabwe dollars are worth nothing. Even if they can be exchanged for something today, perhaps not tomorrow.

What is a reichsmark or a CSA dollar worth? Once something, now nothing.

Do you trust the US govt? Do you trust Wall St?

Anonymous's picture

As the author states, Gold is a hedge against inflation.
Show me inflation?

We've already had it over the last 25 years. Going forward is nothing but deleveraging, reduced CPI, and deflation.

Anonymous's picture

Price out some services.

Attending college,
Having heart surgery,
Buying a congressman...

Anonymous's picture

Gold is a hedge against devaluation and deflation and other instabilities, not so much inflation. Gold is money, USD is a derivate. Since -71 it is not even connected to its underlying asset. It is amazing.
A collapsing currency is deflationary i nominal terms (Island) and always in real terms (Island, Zimbabwe). You think deflation is always good for the value of the currency? It is not. Can you give one example in history, where debt deflation/bankruptcy increased the value of the currency (to gold)?
Any country with a printing press will print.

Anonymous's picture

Gold = "In God I trust"
FRN = "In Satan I trust"

Jerome Lester Horwitz's picture

Edwin Viera Jr. - What Is A "Dollar"? An Historical Analysis Of The Fundamental Question In Monetary Policy

Well worth the read!

Before you can determine what a dollar is worth you first have to understand what a dollar is.

Anonymous's picture

Good paper. It points out that what we think of a dollar (a single paper dollar bill) is not a dollar. I think Greenspan once said that a dollar is 100 cents.

The correct price of dollar (beyond what somebody is willing to pay) is hard to determine.

What is easy to determine is the general trend in valuation of fiat currencies. To do this choose your relevant time period (1 year, 10 years, 100 years) and consider that currency's ability to purchase a basket of goods and services that matter to you (food, shelter, fuel, medical care, education,...)

Another method of trend valuation is consider if trust in the printing authority (Federal Reserve) is rising or falling and whether there is any reason for that trend to change.

"Toto, we're not in Kansas anymore, and that man behind the curtain seems venal."

Anonymous's picture

How to Value Gold in terms of USD.

Gold = ( # of USD in existence / level of trust in Federal Reserve ) / # ounces of gold mined

to simplify...

( unknown positive integer / 0.0000000...1 ) / 3.X Billion


USD value per ounce of gold = ~infinity / 3.X Billion

pslater's picture

Arguably one of the most valuable (and timely) pieces ever done on ZH.  I'll be working on some spreadsheets real soon......

VegasBD's picture

Well that explains why most of it went right over my head.

Or it could be the bottle of Makers Mark I just found in my cabinet...

percolator's picture

Since I assume you live in Vegas and I do too, we ought to get together as I'm fond of bourbon and hate to see people drinking alone.

gmrpeabody's picture

Maker's Mark......well at least some of us are doing alright.


I drink alone, and when I do, I prefer to be by myself.

DoChenRollingBearing's picture

Hey, pslater, if you do run some spreadsheets (checking correlations between 2005 and now for example), please advise the ZH community, in this thread or the next convenient gold thread.

The paper is way too dense to plough through on a Friday night for me, the math alone will take me sometime to digest.

Still, if the authors are right, this is an important set of knowledge for those of us who like gold.

Gold...Bitches said fair value is about to increase substantially.  I agree.  If fair value goes up like FOFOA thinks, then, well, the authors may have gotten it all wrong.  Or maybe not, I will have to read the paper to better judge their conclusions.

In these crazy times, we may soon get to see!

Anonymous's picture

This paper has been out there for five years.....

Crodus's picture

Well, do you feel as if there is new knowledge in this article? Much of it falls back on common sense once you have the field data to form an opinion with some backing. The market value of gold has "a non-trivial connection between real gold prices and the US stock market," which bases itself on its dependence on an established trading system. Trying to find the lurking variables that it is dependent upon is the trick. Dependence hides when the bubble grows because the system's strength drives away the need to look for connected ties between parallel industries. It changes with the entrance of weakness in a sector of the market and the shifting investment wealth (buying frenzies, HFT, apocalypse-worshippers) overload one sector and bring the dependence/independence of it into focus.

Also, I don't think people appreciate the workings of crisis when they aren't happening. Gold has been rising the last decade but everything else lost its appeal in the later half of this blessed millennium.

As a part of the younger generations, I'll hold a grudge to those in the US who blew the chances of a superpower and mourn the patriots who gave us a missed chance.

Get_to_the_choppa's picture

This is why I love and hate ZH.  Here I was all set to turn off the brain for a bit and go watch some of the Olympics on tee vee, and now I'm going to have to read this paper.  Actually I think it's mostly ice dancing tonight so maybe not so much of a loss...

WaterWings's picture

Love your damn avatar. And not to grafitti your billboard:

Eventually the supply of mined gold will dwindle, which will drive prices up unless world population experiences zero growth in the foreseeable future.

What about reverse-growth from because of massive die-offs from starvation, bio-engineered catastrophes, and straight up hot lead?



WaterWings's picture

In that circumstance, far off in the future, a substitute medium of storing value may be discovered and used.

Well if it ain't a precious metal it'll be the same murderous musical chairs ad nauseum.

Anonymous's picture

Well, there's cryptographic digital tokens currently in development by computer scientists and economists. Here's a link to a discussion in Mises Institute.

The supply of tokens is limited by computing power which in turn is limited by the cost of electricity which in turn is limited by energy production. It's designed so that new tokens require more computing power to create and annual production is actually declining. Given enough time, as the pool gets disproportionally larger and as annual production drops, the supply will be nearly constant. It's hard to know which design of digital currency, all in experimental stage, will ultimately be chosen, if ever, by the Market in the future.

Before precious metal, humanity has used seashells, tea leaves, and feathers as a store of value. Now, some people use wine and cigarettes. I won't be surprise if future economies used abstract mathematics as a store of value and the Market is priced as such. Economists will need to write a paper on the fair value of cryptographic hashes, prime numbers, elliptic curves, etc.

chumbawamba's picture


There can be only One.

I am Chumbawamba.

dumpster's picture

soros buys gold

rogers buys gold

poulson buys gold

india buys gold

china buys gold

sinclair buys gold

hedge funds buying gold

paupers  yep lol

chumbawamba's picture

Chumbawamba buys gold.

Enough said :)

I am Chumbawamba.

Anonymous's picture

Paulson bought 5x the Citigroup, Bank America, WellsFargo that he bought gold.

In fact, thats true across the HF complex... Soros, Tepper, Lambert, Mandel.

So if you like smart HFs... you like Financial stocks.

Anonymous's picture

Who's left to buy at a higher price? Me?

Get_to_the_choppa's picture

Aw shucks fellas. *kicks a rock*


chumbawamba's picture

Ow! FUCK!  Watch where you kick those things!!

percolator's picture

10-4 on that choppa.  If ZH does not stop posting so much quality content I might sue them for ruining my social life.

Jay's picture

I like to price gold against gasoline for a rough idea of whether gold is cheap or dear. In 1960 gasoline was about 30cents a gallon and gold was $35 per ounce, so it took about .0086oz of gold for the gallon of gas. Now it takes about .0027oz for the gallon.

swmnguy's picture

That's a good one.  I read somewhere that an ounce of gold, ever since Roman times, would buy one a good suit, belt and shoes.  Nothing too extravagant, but good enough stuff.  Again, an attempt to quantify the price in terms one can readily grasp.

Anonymous's picture

Since Roman times, the human population has multiplied at a higher rate than the physical volume of gold in circulation


Bam_Man's picture

And technology and global trade have greatly lowered the production cost of suits, belts and shoes.

VegasBD's picture

Think thats in the crash course videos.

But Ive found that to be true about a lot of things.

Gold tends to always buy the same amount of 'stuff' with a natural amount of deflation over time from better manufacturing processes.

Hansel's picture

I expect an ounce to be more valuable than your comparison now, i.e. maybe 1/4 or 1/10 ounce for the same garb.  The reason is there are far more people around now such that the amount of all mined gold yields about 1 oz per person globally, and additionally you would need to considered that large amounts of said gold is held out of circulation by central banks.  I've been thinking of many different metrics for the worth of gold.  Another comparison I've thought about is what price of gold would be required to balance the Federal Reserve's balance sheet after applying an appropriately marked down valuation to the assets on the Fed's balance sheet, including an interest rate for Treasuries I think more appropriate given the deficit problems, so that assets equal liabilities (the Fed's liability side consists of cash).  One can come up with all kinds of different prices.

faustian bargain's picture

A nice suit, not even a bespoke one but only made-to-measure, is going to cost you way more than $1000.

So the whole suit thing runs into the steak-vs-hamburgers deal.

Anonymous's picture

Try buying both in East Asia.

Hansel's picture

Maybe.  But the argument gets into the whole "is gold money" predicament.  At 1 oz/person if gold is the only real money (which I realize it probably isn't), you are saying that the entirety of a persons wealth, on average, will only buy a suit.  I was implying that a fair value of gold is higher than its current price around $1100.

Hansel's picture

Here's more food for thought.  The U.S. has 262 million oz of gold worth $292 billiion at today's market price.  That gold is the country's accumulation of wealth through its entire history.  This years deficit at ~$1.5 trillion is ~5.1 times its entire gold supply.  Last year was about the same.  By printing (debt-backed) money in the fashion we are, we claim to produce 5x the wealth (in gold) accumulated in 222 years, every year.  Which money has more value?

mouser98's picture

i think you could increase the value another magnitude by comparing gold reserves to public debt "reserve", currently at $12.4 billion.  that yields a factor of X42


Anonymous's picture

Give me your house and car and I promise you your wealth won't drop. Thank you in advance.

Hansel's picture

If you give me some gold in return.

Anonymous's picture

Hansel: The U.S. has 262 million oz of gold worth $292 billiion(sp) at today's market price. That gold is the country's accumulation of wealth through its entire history. This years deficit at ~$1.5 trillion is ~5.1 times its entire gold supply.

Me: Give me your house and car and I promise you your wealth won't drop. Thank you in advance.

Hansel: If you give me some gold in return.

You didn't catch my point did you? There's more to wealth than the accumulation of gold. To calculate a deficit to gold ratio and think you've done anything of any real significance is the dumbest fucking idea ever.

Hansel's picture

Clown, do you think of your wealth as 1 house and 1 car, or as a house worth $XXXXX dollars and a car worth $XXXXX dollars?  I'll put words in your mouth and say yes, but those things are only worth what you can sell them for.  Enter money.  If U.S. dollars aren't money and gold is, see my prior posts.  Mental midget.

faustian bargain's picture

I agree that the undistorted value of gold is going to be way more than $1100 (today's equivalent). I think the entirety of a person's wealth is not represented by the amount of money they hold though...unless you expand the word 'money' to mean anything that has a value...which would be impractical.