Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 22nd April 2012.
We addressed the above question last year and arrived at the answer: no, gold left bargain territory long ago. We remain bullish on gold not because we think gold is still cheap, but because we expect it to get a lot more expensive.
This isn’t a "greater fool" game that we are playing, in that our belief that gold will become a lot more expensive over the years ahead isn’t based on the expectation that people will be silly enough to pay a much higher valuation in the future for an asset that is already over-valued today. It is, instead, a position based on the observation that the world’s most important central banks and governments remain committed to a course that ends in catastrophe for their economies and currencies. To put it another way, gold may well be expensive relative to the current economic backdrop, but it is cheap relative to what the economic backdrop will be 5 years from now if the current policy course is maintained. And at this stage there are no signs that the current policy course will not be maintained.
Evidence that gold is no longer in the bargain basement is provided by the following long-term monthly chart of the gold/commodity ratio. Relative to commodities in general, gold hit a 50-year high late last year. In fact, last December’s peak in the gold/commodity ratio could have been an all-time high. This tells us that the gold market has fully discounted the bad policies of the past several years. As an aside, it also tells us that the fabled gold market manipulators are doing a lousy job and should be fired (gold’s excellent performance over any reasonable investment timeframe is no doubt why promoters of gold-suppression theories tend to focus on timeframes that could only be of interest to daytraders).