Mar 20, 2013|
A proven indicator says gold could jump 600%
What do you think foreign reserves of central banks comprise of? Well, they have to have the world's safest and most liquid currencies, isn't it? But is any currency safe these days given the unlimited printing it is being subjected to. Certainly not we believe. It is thus imperative that these banks diversify into a currency that cannot be printed at will and the one that has stood the brutal test of time. And what better option here than the yellow metal gold.
The Gold Money Index
In fact, such a move of central banks making gold a greater percentage of their forex reserves is already underway for quite some time now. Thus, the ratio of central banks forex reserves to central bank gold reserves gives us an indication of how far the gold diversification exercise has gone. However, a gold analyst who answers to the name of James Turk believes that the ratio serves another very useful purpose. In fact, he prefers to call it the Gold money index and is of the view that the ratio is a very reliable indicator of the fair price of gold.
Fair price of gold? Isn't this the 800-pound gorilla in the room when it comes to gold buying. We've known since ages that gold should be a must have in one's portfolio. But unlike stocks and bonds, we've never been able to get a handle on what the fair price of metal looks like. And if this indicator proves as reliable as it is claiming to be, we will have solved the problem of exiting from the metal as soon as it reaches its fair price.
So, how exactly does this gold money index work? Well, as per Mr Turk, the fair price of gold is nothing but the ratio of central bank forex reserves to its total gold reserves. And as evident from the chart, gold's fair price was way higher than its actual price back in June 2011. Since forex reserves have only swelled since then, it will be fair to assume that the gap would have widened further or at least remained as it is.
The best is yet to come though. Gold doesn't become overvalued the moment actual price goes above fair price. Past data suggests that it starts coming down only when the actual price has become two times the fair price. For us though, even the convergence to fair price will be more than sufficient we believe. Simply because this event would alone make possible a 600% percent jump in gold price from the current levels.
Of course, there are people who would argue that we live in vastly different times and thus, the past data is of absolutely no use. But as Mr Turk rightly points out, the central planners are indulging in the exact same buffoonery that led to disasters in the past. And they seem to be using the exact same excuses for their alleged bubble building. But for those who would rather rely on numbers, the gold money index suggests that it is still not too late to buy gold.
||Rahul Shah (Research Analyst), Managing Editor, Microcap Millionaires has led the team from the front in developing some of our most stringent and rewarding research processes. As per his own admission, the turning point in Rahul's life as a financial analyst came a few years back when he got introduced to the works of Warren Buffett and Charlie Munger. From Buffett, he understood the value of investing in good quality business with powerful moats and strong management teams. Charlie Munger on the other hand inspired him to be a lifelong learner and use mental models in order to arrive at the crux of matters across most disciplines. Rahul firmly believes that in order to be successful at investing, you have to do the big things right and possess a great temperament and a contrarian streak.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.
Aug 21, 2017
PersonalFN explains the chief factor pushing gold prices up of late.
Aug 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
Aug 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407