March 13, 2014
Century Management’s Gold Valuation Analysis
Gold has confounded economists and investors throughout time. Nathan Meyer Rothschild (1777-1836), the top financier of the early 19th century, said, “There are only two people who understand gold: One is a director in the Bank of England, and the other an obscure clerk in the Bank of France. Unfortunately, they disagree.”
Today, nearly 200 years later, Ben Bernanke, the former Chairman of the U.S. Federal Reserve, remains equally perplexed when it comes to gold. In a statement to Congress on October 7, 2013, he said, “Nobody really understands gold prices and I don’t pretend to really understand them either.” In addition, Janet Yellen, the current Chair of the U.S. Federal Reserve, stated in her testimony to Congress on November 14, 2013, “Well, I don’t think anybody has a very good model of what makes gold prices go up or down.”
With all the different opinions surrounding gold, there are basically only two different ways of looking at gold: as a commodity or as money. Some believe gold‘s sole value is that of a commodity, where it is most often used in jewelry, industry, medicine, dentistry, technology, electronics, and aerospace. Others believe as financier, banker, and philanthropist John Pierpont “J.P.” Morgan (1837–1913) did: “Gold is money.” Investor demand has served as the biggest swing factor on the price of gold over time, as central governments, institutions and consumers have frequently invested large sums in gold during periods of great uncertainty, deflation or high inflation.
For purposes of our research, we do not need to reconcile whether gold should be viewed as a commodity or as money, or why gold prices rise or fall. The focus of our research is to determine the price at which gold becomes an attractive investment.
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