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