The Real Value of Gold

Marc Faber The Real Value of Gold

Marc Faber, an investor from Switzerland, who falls in the same league as that of Peter Schiff, is seasoned in the trends of the value of gold market. He had correctly speculated that there would be a spike in the prices of oil in 2000s and he knew that the surge just market the beginning of a decade. Ever since then, he has stopped placing his bets on the dollar.

Recently, he also claimed that assets owned by the government are over-valued, while gold, in comparison, is undervalued.

As per Marc Faber, government assets include the bonds, which clearly have low-interest rates and run for longer periods. To prove his point, it can clearly be observed that the consumer and government debt was never so high previously.

As per the laws of economics, something has to be given, due to which, gold beats the government bonds and gives you better returns during your retirement.

There is nothing that there has been a sudden and massive demand for bonds off late. When you have a look at the Consumer Price Index, it also reflects that the government bonds are still at a below-inflation level and hence, by making your investment in government bonds, you are just becoming poorer with every successive year by investing in bonds.

Measuring the Value of Gold

If you have to know the value of gold, Faber has given the right relationship.

Since the past 40 years, that is ever since Gold Standard ended, there has been a strong relationship between the value of gold and the total debt level of US, which can be seen in the chart too.


Clearly, as per the graph, the value of gold has never become so undervalued in comparison to the US debt value.

Although there might not be any sudden correction or increase in the prices of gold to correct the gap, it is a clear indication that the US government might stop printing money in a bid to cut down on the debt pile-up. This is the reason why gold is a more stable investment when compared to any currency.

Since the past ten years, gold has had a strong correlation with the interest rates of the Federal Reserve and it is highly undervalued like it was towards the end of 2009 – beginning of 2010 period. Since Q3 2009 to Q1 2011, the price of gold only went up by $1,100 / oz to $1,500 per oz.


Despite the fact that the price of gold is underrated, the real interest rates in comparison are also low. But certainly, when the interest rates will start picking up, the price of gold will shoot up suddenly.

The Real Value of Gold: Production of Gold Should Slow Down

Although the production of gold is continuing at a steady pace and the value of gold inherently strong, there are limitations the production rate faces, which include the limited amount of ore, other hurdles faced in the regulatory and technical fronts etc.

The Real Value of Gold: Production of Gold Should Slow Down

Also, over the past decade, the average time required to build a gold mine has doubled, which was previously 10 years and has now gone up to 20 years. As per a report from The World Gold Council, the gold mining levels would peak in 2014 and would gradually start dropping towards 2015.


Due to the reduced mining and production of gold, the value of gold is bound to increase eventually.

Rise in Demand for Gold

As of now, there are no indications that the demand for gold worldwide might drop.

The two major consumers of gold, India and China, have a large sect of middle-class population, that believe in piling up gold for savings. Additionally, both the US and Euro Zone are in crises and unless there is any improvement in their financial scenario, the value of gold will continue to be the best investment and hedging option.

Gold Bullion is the Winner

Another reason why gold’s prices have not picked up momentum off late is that the mining companies that grew expanded based on the price of gold in 2011.

And thus, they have taken a hit so bad that they are undervalued and are now drawing interest from the private equity investors. Due to this, mining stocks have gained at a greater level in comparison to gold since the past few months.  Thus, they are also vulnerable to huge boom and bust shocks just like how gold equities are.

Also, when the value of gold starts to surge in the days to come, news will do rounds about how mining indexes are entirely funded companies. However, we will stick to the actual investment metal to buy and hold as a long-term investment as it will protect against inflation.