Money Matters - Simplified

Will Gold Go to $6,300?

That is the gold valuation iconoclastic Societe Generale analyst Dylan
Grice proposes in a recent issue of his regular client note, Popular Delusions.
Surely, if he is correct, it's time to take a seat next to central
banks -- who look set to be net purchasers of gold in the second half
of 2009 for the first time since 1988 -- and ride this train for a potential quintupling in price.

Where does that number come from?

Grice
didn't pluck $6,300 out of thin air -- the figure is based on the
assumption of a Fed monetary base (approximately $1.7 trillion) that is
100% backed by U.S. gold reserves (263 million troy ounces), as opposed
to being just 15% backed as it is at present. Could this happen? It
certainly could, especially considering that it occurred in the 1970s,
in a political/economic environment that bears some striking
similarities to the present (in fact, peak gold prices during that
period implied the dollar was "over-backed" to the tune of 140%).

Nevertheless, Grice compares his own "valuation" to those relic
metrics of the dot-com mania -- market value per clicks/eyeballs/etc.
-- and suggests that we could be in an early phase of a gold bubble.
We've certainly witnessed increased interest in the metal this year,
with gold outpacing stocks, along with many gold mining shares (not to
mention another precious metal and historic hard currency -- silver;
the iShares Silver Trust (NYSE: SLV) has gained 64% year-to-date):

Company

% Year-to-Date Price Return

(at Nov. 30, 2009)

Yamana Gold (NYSE: AUY)

74%

SPDR Gold Shares ETF (NYSE: GLD)

35%

Newmont Mining (NYSE: NEM)

34%

Agnico-Eagle Mines (NYSE: AEM)

22%

Kinross Gold (NYSE: KGC)

10%

S&P 500 Price Return

21%

Source: Capital IQ, a division of Standard & Poor's and Yahoo! Finance.

Gold is a (good) speculation; prefer dividend and international stocks as a hedge

I've
been giving a lot of thought to gold recently, and Grice's analysis was
a useful reminder that I remain incapable of valuing the yellow metal;
as such, I'm backing away from my earlier view that it is a good hedge
for inflation/dollar risk and classifying it as a speculation -- albeit
an excellent one. Instead, I believe that high-quality dividend stocks
and well-priced international stocks are better alternatives for individual investors seeking to hedge these looming risks.

The Federal Reserve's current policy is creating tangible risks for investors. Global Gains co-advisor Tim Hanson explains why you need to get out now!