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Gold Price Model Says Gold Is Still Undervalued

Gold hit a price low of approximately $1,140 in early November 2014. Since then it has rallied dramatically, possibly because of global fears about the financial system, the Swiss National Bank removing its peg to the Euro, more QE, escalating war in the Ukraine, or simply that gold prices were over-extended and ready to rally.

In my opinion gold reached an important low in November, and in spite of a rising dollar, has rallied since then in dollar terms, and even more in most other fiat currencies.

However gold is still undervalued by about 16% according to my long-term empirical model. Further, gold has potential to rally far higher and is likely to overshoot the 2014 equilibrium price of $1,527 calculated by the gold model. Gold could easily reach $2,000 by late 2015 or 2016.

The two variables, debt and crude oil, will dominate in the calculation for future gold prices. My conclusion is that gold is still undervalued and that my model projects substantially higher prices for gold through the balance of the decade. The model uses plausible assumptions about increasing debt and the price of crude oil over the next six years and indicates that $5,000 gold and possibly $10,000 gold are reasonable and should be expected. Please note that certain events, such as hyperinflation in the United States, a nuclear war, or even a widening Ukrainian war could easily push the price of gold (in U. S. dollars) far higher than the model indicates.

If central banks fail in their efforts to increase inflation, and the world devolves into a global deflationary depression and possibly a nuclear winter, the dollar price of gold could be unpredictable, but the purchasing power of gold will almost certainly increase as paper assets and fiat currencies crash and burn in a deflationary depression.

In my opinion the deflationary depression scenario seems far less likely given that central banks have a one hundred year history demonstrating both their willingness and ability to devalue their currencies, create inflation, and to drastically increase the total debt and currency in circulation.

Source GoldSilverWorlds

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