Gold / Silver Valuations – Is the market right, wrong, or right on the money?

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In every market an asset valuation falls somewhere within the spectrum of over-valuation and under-valuation. It is our job to determine when the market is wrong and whether an asset is currently over-bought (over valued) or over-sold (under valued), and in which direction is the trend currently headed.

Gold hit the very bottom of under valuation in the year 2000 when is fell all the way to a low of $279 an ounce, with silver trading at a spot index of approximately $5. Now there are many ways to evaluate the valuation metrics for an ounce of gold, but let’s take a quick look at one of the most dependable and traditional gold value yardsticks and compare today’s pricing with a longer view, big picture valuation.

DOW Index Ratio – Buying the DOW

 This traditional valuation tool illustrates just how far out of favor gold fell as an asset class in the year 2000. One can also easily spot the historical trend of greater ups and downs, with trend velocity peaking on each side of the medium average of 4 oz. of gold to buy the DOW (the multiple cost of an ounce of gold being equal to the numerical value of the DOW index). We are clearly headed to an “overshoot” of over-valuation at some point in the future, but what will that number be? Well, presently the DOW has been trading in the 13,000 range for the last 4 years so either gold could gold that high or higher or the DOW could come down to 6000-8000 range. Either way, gold has a way to go in this valuation and will no doubt over-shoot the medium (the higher the peak, the lower the valley – see historical trend in graphic) down to a range of ½ oz – 1/10 an ounce to “buy the DOW.”

Future Gold Valuation – An Actuarial Analysis

This Actuarial Analysis calculates the full range of probable inflationary outcomes over the next 7 years and assigns a historical probability to those inflationary outcome rates. It is important to remember the historical purchasing power of gold has remained the same for thousands of years and that the relative currency value for an ounce of gold tends to reflect that intrinsic purchasing power over time.

The current official rate of inflation, by government calculation, is approximately 3%. However it is believed that number is highly suspect, not to mention self-serving, and has been independently calculated to be more in the range of 9% currently. If one simply compares the 3rd column (annualized inflation rate) to the 6th column (expected value of gold) we’ll get a good idea of the expected inflationary impact on the price of gold.

The final number of $6558 is the weighted and averaged price of gold per ounce, in today’s dollars, given all of the possible outcomes vis-à-vis probable inflationary outcomes in the next 7 years.  This result is consistent with industry-standard actuarial analysis and calculation and this study is based on widely-available historical data.

Silver Pricing Ratio

Over the long arc of history silver has been valued at a 1/15 to 1/30 ratio to gold, ounce for ounce, with the average tending towards a 1/25 to 1/30 range. As of the date of this article, silver is now under-valued at a 1/55 ratio.

However, we are in an entirely different market relationship with silver than at any time in history. In the last 35 years about 7000 unique market applications have been developed for silver and it is now ubiquitous within our industrial / commercial world, and in most cases simply cannot be recovered from its application (the amounts being simply too small in each individual use to make the recovery economically feasible – picture the small amount used in your cell phone for instance). And as a result we’ve seen the supply stock of above-ground silver bullion fall from an estimated 12 billion ounces in 1900 down to approximately 1 billion today, with demand increasing dramatically (just think of all those portable electronic devices being used world wide right now).

This has created true and classic “market squeeze” of ever-increasing demand and a falling silver supply. That makes silver a real universal and irreplaceable commodity of the first order and creates an immense pricing support and a relentless upward pressure on the future valuation of silver.

Given just the historical gold ratio valuation for silver, if gold reaches a value of $6500 (an increase of 375% from $1732) we should see an increase in silver to $260 an ounce, which would be a 1/25 ratio to gold.  That would be in increase of over 800% from its current valuation.

In this scenario we therefore have a 375% (gold) and an 800% (silver) upside market opportunity. What this demonstrates is a clear “leveraged opportunity” to dramatically increase one’s purchasing power and to leverage that advantage into further asset class opportunities in the future.

The next 3 graphics illustrate the engine driving inflationary expectations vis-a-vis pure dynamic debt monetization.

Exponential Debt Monetization:

Dollar Devaluation of 32% over the last 12 years:

Dollar Purchasing Power Loss (this is where the rubber hits the road):