State Street Global Advisors’ Chris Goolgasian suggests how to ‘value’ gold

How to value gold is one of three questions Chris Goolgasian, a senior portfolio manager in SSGA’s investment solutions group, tackled in a recent regular report for the SPDRS Gold ETF.

The other two are whether the gold market is in a bubble, and how much gold an investor should own.

In this article, we follow his logic in answering the first question – how can one ‘value’ gold?

The senior portfolio manager in SSGA’s investment solutions group starts by noting few investors would guess gold was at $1,674 per troy ounce, if they had been completely isolated from all market information from back in 2000, for example.

Goolgasian’s point is not that bullion’s price now is so high.

He says the point is to ask “whether having any data or statistics actually helps you ‘value’ gold? How would you even remotely connect the price of gold to any live piece of economic data? Our belief is that for the most part, you can’t.”

An analyst’s prediction for, say, an equity benchmark, is based on stock valuations, company earnings, and what investors will pay for those earnings.

“You can’t do that with gold – an expert who says $2,000 per ounce is his target likely says that because he knows the price is currently $1,650 per ounce. But we have an asset class that provides no earnings, no cash flow, no dividends or interest and no prospects for any. From a classical modelling perspective, this presents quite a challenge to the statistician.”

Analysts could use inflation as some guide to gold’s price, or the value of the total gold stock relative to the US monetary base, or the value of the total gold stock relative to the market capitalisation of US equities.

The first guide – inflation – raises the question, is there a rationale for gold to keep up with inflation?

“One could make the case that both jewellery and industrial use should reflect inflation increases. For example, consumers of jewellery, who have seen their income rise at the rate of inflation for say the past 30 years, should be willing to purchase jewellery at some inflated rate over that time. After all, most if not all of their other expenses have been rising with inflation-why shouldn’t gold?

“Similarly, industrial users should react the same way. They have cost and revenues rising with inflation, why should gold be an exception that doesn’t keep pace?”


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