How Should Gold Be Valued This New Half of 2013?

      With the huge drop in the gold market as June closed, one question lingers for many investors: Has gold become overvalued or undervalued? “The question is all the more relevant now that the precious metal is trading at $1,200 an ounce, having shed $700, or 38%, over the past two years, including nearly 14% during June alone,” MarketWatch.com correspondent Mark Hulbert puts forward in his June 28 commentary, Gold: Is the bad news over?. Many investors are still digging for more information. With various market analysis reports over at Forbes.com, a guide to gold pricing from bullionvault.com, and even daily updates from Reuters Business, there seem to be ongoing encouragement in buying gold and gold bullion. That encouraging light however is weak. According to Hulbert, “One study stirring much controversy among gold enthusiasts suggests it has more to fall.” That study, entitled “The Golden Dilemma”, is by the National Bureau of Economic Research. “Its major finding is that regardless of how you define gold’s ‘fair value,’ gold sometimes trades well above it and at other times well below. An ancillary finding: Whenever bullion deviates significantly from fair value, it eventually returns to trade at that level,” Hulbert quotes the bureau’s research. As a concession, the study accepts the fact that there is no singular definition of the value of gold. Campbell Harvey, the study’s co-author and finance professor at Duke University, iterates that despite no sole agreed-upon definition, their study closely analyzed the factors which they, and most finance experts, are aware of. “The list they studied included defining gold’s value as a hedge against inflation, currency fluctuations, or low real interest rates, or as an insurance policy against hyperinflation or collapse of the financial system.” Harvey and his colleagues discovered that each of the above situations were unsuccessful in detailing more than a small portion of gold’s price swings over the shorter term. As for long term situations, the findings become more positive. “When measured over many decades, gold is a decent inflation hedge, maintaining its purchasing power,” Hulbert explains Dr.Harvey’s research. For a more in-depth analysis, go ahead and read the full article on MarketWatch.com.

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