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Is there a "fair value" for Gold?


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...gold is not unique to the United States; it is an international form of money and so we also have to take into consideration the US dollar exchange rate, since anything we price on international markets in US dollars will fluctuate along with changes in the US dollar exchange rate. We know from the US trade deficit that the US dollar is over-priced on foreign exchange markets and the US is putting considerable pressure on China to help devalue the dollar. The only reason gold is not $850 an ounce (or thereabout) today is that the US dollar is over-priced. As the US dollar exchange rate falls the gold price in US dollars will rise.


Like all markets there is a real possibility that the gold price will overshoot its fair value and the gold price could therefore exceed $850 an ounce. But like all markets the gold price is bound to return to its fair market value in the event that it does overshoot the mark. Also, keep in mind that the value of gold in US dollars will increase over time in proportion to the inflation rate of the US dollar. Unfortunately, the Federal Reserve of the United States has stopped publishing M3 data and so we have lost a great tool for gauging the dollar's inflation rate. Historically the inflation rate of the dollar has almost always outpaced the inflation rate of gold, so the longer it takes before the dollar exchange rate falls, the higher the fair value of gold in US dollars becomes.


None of what I wrote here is new. I have been writing about the fallacy of viewing gold as a commodity since 1998 (the LBMA announced the volume of gold trading for the first time in late 1997). Below are links to older articles that expand on this week's ideas if you would like further reading.


...MORE: http://www.paulvaneeden.com/Library/200310%20Commodity.php

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