The case for Gold in Australia

In a fiat economy, the only true way to measure the value of an asset class is to measure it's worth against other asset classes.

For example, how much gold can be purchased for every 100 shares in the AORD?  How much property can be bought for 1000 oz Gold?  Measuring in this way will show an up/down trend within set bounds.

Property spruikers will continue to claim that property is the best way to invest no matter what, because that's their game and they get money out of it.  Stockmarket firms will continue to tell you that shares are a good long term investment.

The way to build real wealth is to ensure you're invested in the undervalued asset during every cycle.  Below are two graphs showing the AORD:Gold ratio and Gold:Property ratio.

The higher the AORD:Gold figure, the better value gold is to buy, rather than the AORD. There are two almost identical peaks above mean over the years, which are then followed by troughs below mean.

Right now we're in the down cycle, meaning gold is nearing it's high point compared to the AORD.  But as in physics, the higher a peak goes above the mean, the lower it will dip below the mean.  Gold has further to rise before this trough bottoms out.

Using this measure, gold could hit ~$5000 very quickly.

In this case gold has been undervalued compared to property, and still is somewhat. Expect gold to peak above mean, conservatively at the same ratio as ~1988 at a ratio of 5.5:1.

Using this measure, gold could hit ~$3000.

The true figure probably lies somewhere in between at ~$4000, with the stockmarket to continue to be stagnant at best and property prices to drop significantly.

-----------------

Another interesting way to look at gold is to measure it vs M1 (one measurement of the total money supply).  To picture this, imagine that gold is not rising in price, so much as the value of each dollar in the economy is worth less and less (because there is more supply).

My messy graph merges gold vs M1 and it shows that as the money supply increases so does the price of gold.  With the Federal Reserve in America recently stating they'll keep interest rates artificially low (effectively 0%) and more quantitative easing on the way, expect M1 to continue to rise sharply.

Gold will follow.