Historical Indicators Point to Overpriced Gold

Gold is overpriced relative to a selection of 10 globally significant prices and financial variables with a potential bearing on bullion prices. The gold price implied by the selected indicators is US$1,177/oz compared to a current price of $1,340. Gold prices are formed from a combination of macroeconomic forces, primarily changes in relative prices, and periodic movements in wealth distribution such as occurred with the oil price shocks in the 1970s and the rise of China as an economic power in the early 2000s. Being the consequence of the interaction of so many different variables globally, forecasting gold prices has been notoriously difficult especially due to the instability in the relationships with other prices. The implied gold prices shown in the table are based on relationships between average gold prices and the prices of each of the variables between 1975 and 2000. There is a marked divergence between the gold prices implied by both soft and hard commodities and the prices implied by current financial market conditions to which the gold price is currently more closely aligned.