Is gold overpriced or underpriced? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 25 March 2013
Is gold overpriced or underpriced? A  A  A

Gualfin, Argentina

Stocks continued mostly going up last week. Gold bounced up and down...but held above $1,600. Most people would much rather have stocks than gold. Most of the time, they are probably right. Gold pays no dividends. Nor does it invent new things or open up new markets...or any of the other things that make stocks go up.

And now, most people seem to think that there is a recovery underway...and that the authorities have everything under control. So who needs gold?

According to Kim MacQuarrie's book, "Last Days of the Incas," a sailor in the 16th century earned about 8 ounces of gold for a year's worth of service.

How much does a merchant seaman today earn? A quick Google search reveals a wage of about $2,500 a month...or about $30,000 per year. That seems a little low, probably not including the value of health insurance and so forth. And maybe it includes all those sailors from Indonesia and the Philippines, who must earn less than the typical American mariner. So let us say $40,000, which is about the average wage in the US.

Hmmm... 8 times $1,600 does not take us very far. Only to about $12,800. So, either MacQuarrie is wrong. Or sailors make a lot more today than they used to. Or the price of gold is far too low.

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Sailors were probably not very well paid in the Age of Discovery. We will guess that the average wage was probably closer to an ounce of gold per month. That would be a wage of $1,600 monthly...still low by US standards, but not by the standards of most of the world! By world standards, a sailor probably earns about as much, in gold, as he did 500 years ago.

Those are the kinds of problems and questions you run into when you're trying to figure out whether gold is overpriced or underpriced. All we can tell is that on the evidence of the sailors' wages, gold is probably not far from where it ought to be.

Pizarro hit the jackpot when he conquered the Incas and stole their gold. During a four month period, March to July of 1553, the conquistadores melted down 40,000 pounds of Inca jewelry, art, tableware and religious items. Twenty percent was sent back to the King of Spain. The rest was divided among the 168 conquistadores.

It was a bloody business - killing thousands of unarmed Incas at Cajamarca, for example. But it paid well. The horsemen in the group each got 90 pounds of 22.5 karat gold plus 180 pounds of silver. If they had just put the gold in a safe place, to be dug up by a distant descendant in the 21st century, the fortune would be worth about $2,000,000.

Last week, gold got a little boost when it became apparent that 1) Europe still faces huge and disturbing financial challenges, 2) governments are ready, willing and able to steal vast amounts of money from bank accounts, and 3) they are also preparing to put on capital controls to prevent you from moving your money to safety.

We maintain a small bank account in France. It is used just to make repairs and otherwise keep up our house there. The woman who handles it sent this message on Friday:

"Don't put any more money in the account. We don't want to get cyprused!"

How likely is it that the French government will freeze the whole banking sector and skim 10% off of the accounts? Not very. France is not in that kind of a cashflow bind...yet.

But all the countries of the developed world are headed in that direction. They spend more than they receive in tax revenues. And as their debt increases, their interest payments increase too.

Of course, ultra-low interest rate policies - enabled by central bank buying of government debt - keeps interest payments low, for now. But low interest rates don't stay low forever. And as Greece, Spain, Portugal and other borrowers have already discovered, Mr. Market can be a real pain in the derriere. When he insists on higher rates of interest - fearing that he may not be repaid as promised - state budgets get shot to hell. Then, like Cyprus, the feds get desperate for money. They will go after it wherever and however they must.

Which makes saving money dangerous as well as unrewarding. First, the feds suppress interest rates so you get no return on your savings. Then, when they get in a jam they Cyprus your savings directly.

That's just one of the reasons we keep our eye on gold. If the 16th century sailor had taken his annual pay and buried under a tree in Extremadura, it might still be there. The lucky treasure hunter would find himself as rich as the sailor who buried it 5 centuries ago.

The nice thing about gold is that not only does it hold its value over centuries, it is also a valuable that you can keep out of the banking system. Like jewelry or antique autos, you can keep them at home. Bury them under your own tree. Keep them in your own safe. If the banking system freezes up or breaks still have them. Pass them to your children. Give them as birthday presents. Or just lock them up and forget about them.

Gold is private money. Dollars, pounds and euros are public money.

Dollars, pounds and euros are given to us by governments and central banks. Gold is given to us by the gods.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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3 Responses to "Is gold overpriced or underpriced?"


Mar 25, 2013




Mar 25, 2013

Gold is the standard against which currency is issued by the central bank concerned.Its a different matter that the central banks print the paper currency based on the need of the power.
In todays world one needs the currency notes to buy gold.I think it is neither overpriced nor under priced . Its simple equation of demand and supply and also a function of fear and safety.Gold is not given by god anyway.
Some time in future we may have platinum or diamond which may replace gold as safe investment.



Mar 25, 2013

Summarizing your article means investment in physical gold is the way out in current situation of Cyprus . yes , the gold is not going to loose its value and is good hedge against inflation.

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