Think of the yellow metal as portfolio insurance
Gold, like any other commodity, is very difficult to value.The standard asset valuation principles such as “dividend discounting method” for stocks, often don’t work with gold since gold offers no dividends nor any future estimated earnings that can be forecasted and so, does not have a price to earnings (P/E) ratio.
Like bonds, gold does not offer any fixed and regular coupons, which can be discounted at the appropriate interest rates, to arrive at the bond price. The burden of returns from gold falls more or less on capital gains.
So how does one decide whether gold is correctly valued, undervalued or overvalued?
Here the unique characteristics of gold such as a proxy currency or store of value come to our rescue. These attributes of gold help us value it on a relative basis vis-a-vis some of the comparable macroeconomic variables or asset classes. For instance, if one wants to buy an apartment in a particular locality, one does check up the recent prices of similar or closely comparable apartments in the same locality, or more, in the same block. Similarly, we can express (or adjust) the price of goldin terms of changes in these economic variables orasset classes over a period of time, in order to compare the relative growth rates. Such macroeconomic variables or asset classes must have strong historical and economic relationships with the price of the yellow metal.
Drivers who are satisfied with their automobile insurance company will often assume they have “the best” company in the business. They are happy with the price they are paying and feel their coverage is adequate. However, many car owners stop there and don’t look further into their provider to find out whether or not they truly do have “the best” insurer out there. They omit checking to see what other companies are offering to their customers, such as more coverage for a cheaper overall price. Past the final cost of the premium, drivers should look for other things about their insurance company before declaring them as the best choice.