Some Thoughts on the Value of Gold

Reversion to the Mean

In an April 16, 2013 Wall Street Journal video interview, Mark Hulbert mentions that a recent academic study places gold’s fundamental value at approximately $800.00 per ounce.(1)

I did some key-words-searches to verify such a study exists, and I found the study to which Mr. Hulbert is referring. The study was conducted by a former commodities trader for Trust Company of the West, Claude Erb and a Finance Professor at Duke University, Campbell Harvey.(2) The study is based upon a time series of rates of inflation as compared to the fluctuations in value of the hedge against inflation (gold). The study puts the mean value of gold, over a long historical time series, at approximately $800.00 per ounce.

It’s also interesting to note, recent industry estimates for the average costs-of-production for one ounce of gold are approximately $600.00.(3) Which raises the question, what premium should a gold buyer pay, to buy the next ounce produced, of a commodity which costs $600.00 per ounce to produce? Or, expressed another way, what is the fair-market (competitive) profit one should expect for producing an ounce of gold?

Footnotes:
And, MarketWatch pub. The Wall Street Journal 4/16/2013, at: http://www.marketwatch.com/story/golds-fair-value-is-800-an-ounce-2013-04-16
2. The Golden Dilemma By Claude Erb and Campbell Harvey Social Sciences Research Network (SSRN) first posted 6/6/12 at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535
3. The Production Cost of Gold May Surprise You pub. SeekingAlpha.com 4/23/2013, at: http://seekingalpha.com/article/1361321-the-production-cost-of-gold-may-surprise-you

The Bernanke Market

Today, a friend sent me a link to an interesting article (see link below).
In his email my friend suggested that after reading the linked article, I read the first “Reader Comment”. The one from VonMises Jr.

The VonMises Jr. comment mentions Mr. Richard Fisher. Richard Fisher is the President of the Dallas Federal Reserve Bank, and he also sits on the Open Market Committe of The U.S. Federal Reserve Bank.

I’ve been following Mr. Fisher’s speeches for about four years now. Recently he has become very critical of the U.S. Federal Reserve’s Monetary Policy. He has likened the U.S. Federal Reserve’s monetary policy to "Monetary Ritalin" and he has mentioned the difficulties of a monetary policy that lacks a clear exit strategy by referring to the Fed’s Quantitative Easing III (QE III) as the The Fed’s “Hotel California Monetary Policy”. This reference evokes the last lines of The Eagles song, “Hotel California”, which were:



Black Swans

On Thursday (1/17/2013) The U.S. Federal Reserve Bank released the transcripts of its 2007 meetings. [Late 2007 was when the the great housing and mortgage bubble began to suddenly deflate.]

If you depend upon the most knowledgeable economic and financial experts to anticipate the economy’s behavior, and / or to give you advice on how you should behave, so as to grow and protect your assets, the two articles below may cause you to doubt the ability of such experts, and to confirm the existence of Black Swans.(1)
Days Before the Housing Bust, Fed Doubted Need to Act By Binyamin Applebaum – pub. New York Times - 1/18/2013, at: http://www.nytimes.com/2013/01/19/business/economy/fed-transcripts-open-a-window-on-2007-crisis.html?nl=todaysheadlines&emc=edit_th_20130119

Records Show Fed Wavering in 2007 By Jon Hilsenrath and Christina Peterson – pub. Wall Street Journal - 1/18/ 2013, at: http://online.wsj.com/article_email/SB10001424127887323968304578249664285846402-lMyQjAxMTAzMDEwOTExNDkyWj.html?mod=wsj_valettop_email
Timothy Geithner's flat-footed reaction is even more amazing when you realize that Geithner worked in the Japanese Embassy, as a Treasury Department attaché, at the beginning of Japan's "Lost Decade".

Japan's "Lost Decade' was a financial crisis which began with the collapse of the Japanese commercial real estate bubble. The collapse of the Japanese commercial real estate bubble created problems for the Japanese economy which are very similar to the problems U.S. and global economies have been experiencing since 2008.(2)

From a January 18, 2013 New York Times article, "Days Before The Bust, Fed Doubted Need to Act" By Benyamin Applebaum (at the time of the Federal Reserve's transcript's creation William Poole, was the Chief Executive Officer of the Federal Reserve Bank of St. Louis).
“The outcome would have been different only if the Fed and others had reacted back in 2004, 2005, 2006” to curtail subprime mortgage lending, Mr. Poole, now a senior fellow at the libertarian Cato Institute, said on Friday in an interview on CNBC.(3)
Footnotes:
(1) For more on Black Swans see Wikipedia entry, at: http://en.wikipedia.org/wiki/Black_swan_theory 

(2) For more on Japan’s Lost Decade see Wikipedia entry, at: http://en.wikipedia.org/wiki/Lost_Decade_(Japan)

(3) For the full CNBC interview with Mr. Poole go to YouTube and watch, An Interview with former President of the St. Lewis Federal Reserve, William Poole:

More:
"The Role of the Government Sponsored Enterprises and Federal Housing Policy in the Financial Crisis”, at: http://www.scribd.com/doc/106248756/The-Role-of-the-Government-Sponsored-Enterprises-and-Federal-Housing-Policy-in-the-Financial-Crisis

On YouTube key-words-search, and watch, a January 1998 PBS NewsHour interview with then President Bill Clinton, titled "Bill Clinton: Laying the Foundation for The House of Cards"