Just like in any business gold can be considered as a significant asset in precious metal ventures. It is a smart and a practical strategy to buy gold when its value is low, and to sell your gold assets when its value is high. Therefore knowing how to predict the trends in precious metal prices is very significant. This also means that learning how to assess the value of gold accurately is very significant in the process.
In terms of gold as an asset its value cannot be measured by the standard techniques used to measure a usual investment.
In one way gold cannot be considered as wealth in itself because you still need to convert its actual value in currency. On the other hand currency is considered a form of wealth whether it may be fiat or gold because it holds a diverged purchasing power.
Gold is considered as a sterile investment because you can only generate a good value from it when you sell it at a much higher price, or more than the price you purchased it for. Another is that it does not generate any cash flow that is why it is called a sterile investment.
So when the price of gold upsurges it only means that the value of currency depletes. The wealth then is transferred to those who own physical gold or good investments. In the long run wealth is just being re-shuffled among those who make wise decisions in choosing the currency that best cater to their liquidity needs. Their decisions are basically based on identifying which mode of exchange has a higher value and choose it over the one with lower value.
In this way they tend to acquire wealth and keep their assets rolling and growing.
Before making any transaction in the precious metal market venture capitalists make use of different models to index and find out the current value of their gold assets. Among commonly used models are the Fear Index and Gold Money Index. Gold Money Index base there gold value assessment on gold’s historical role as an international legal tender and its global numeraire.
Way back in 1960 when the dollar was still as good as gold, the definite price of gold was actually higher than its actual value. Meaning that the Central Bank holds ample amounts of gold compared to its national currencies circulating in the market. But things changed after 1960 because the dollar’s value was devaluated, therefore giving way for gold’s price to rise higher than it should be. Because of this and certain technical concerns arising from that event the dollar’s fixed link to gold was abandoned in 1971.
As a result the gold price began to ascend but its fair price lingered above its actual price unit in 1974 and in 1980. But the overvaluation of gold was not enough to consider as sustainable. It then fell back again in 1984 but stayed above its fair value unit. Since then gold is considered to be undervalued. The next chart aims to show the relative valuation of gold from 1960 till 2010. It is presented in percentage form where in gold’s actual value is divided by its fair value.
As based from the charts, the gold price had been undervalued for more than decades now due to the rising amount of national currencies under the custody of the Central Banks. The principle behind the Gold Money Index is that “gold still is money”. Things acquire their value because of its usefulness, and the value of gold is being acquired through its usefulness as monetary exchange. At present gold has a valuation of $11,000 per ounce and the government has no power to stop gold from having value nor prevent it from having a fair valuation.
This chart presents, as a percent, gold’s actual price divided by its fair value.
Gold has played its role as international money for 5000 years, gold has been supplanted
by fiat currency for the last 40 yrs because of government force. It is now apparent that Fiat currencies are not working as intended.
the proof of this is the rising price of gold over the last decade.