Three Ways to Value Gold. Three Conclusions. – by Mark Hulbert (Wall Street Journal – March 5, 2017)

Where is the price of gold headed? Well, consider this: One closely followed statistical model concludes that bullion is 46% overvalued, while another says that gold is 35% undervalued. Which is closer to the truth? It’s impossible to say.

Gold poses more difficulty than almost any other financial asset when it comes to determining fair value. The reason that there can be such a divergence of forecasts, according to Campbell Harvey, a finance professor at Duke University’s Fuqua School of Business: “Gold is poorly understood. There are many forces driving the price of gold, and the importance of those forces changes through time…. This is very hard to model.”

Prof. Harvey says that when it comes to valuing a company, “we can look at the fundamentals, the sales, the margins, new investments, debt and dividends, and build a bottom-up valuation.” Or when looking at a country, he says, “we can do a similar exercise looking at GDP growth, indebtedness, consumer behavior, and get a sense of the value of sovereign debt or stock markets.”

But for gold, Prof. Harvey says, “there is not much to work with.” Analysts often disagree as well on valuations of particular stocks or industries, he adds. “But the range of disagreement is [relatively] small. With gold, reasonable people can have sharply different views of the value.”

To see how sharply those views differ, consider three different ways to value gold: as an inflation hedge, as a hedge against political uncertainty and as a way to get portfolio diversification.

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