Gold’s Value: Bear Says $800, Bull Says $5,000

July 28, 2014

Bullish gold expert and bearish gold expert share their outlooks.

Is gold overvalued or undervalued? Are prices headed higher or lower? The outlook for gold has seldom been as uncertain as it is now, with investors sharply divided in their views on the yellow metal. Two gold market experts, Adrian Day and Campbell Harvey, likewise have significantly different takes on the market. Speaking to HardAssetsInvestor Managing Editor Sumit Roy, they each made their case. But while their views on the “fair value” for gold are strikingly different, surprisingly, they arrive at many of the same conclusions.

Campbell R. Harvey is professor of finance at the Fuqua School of Business, Duke University, and a research associate of the National Bureau of Economic Research in Cambridge, Mass. Harvey served as editor of the Journal of Finance from 2006-2012 and has done extensive academic research on the gold market. In 2013, Harvey co-published an extensive paper on gold’s merits as an investment.

Adrian Day is chairman and chief executive officer of Adrian Day Asset Management and the author of “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.” Day is a recognized authority in both global and resource investing and a graduate of the London School of Economics.

Gold Bear: Campbell Harvey

HardAssetsInvestor: Would you tell us the methodology you used to come up with your $800 target for gold?

Campbell Harvey: That is one part of the discussion in a larger paper. And the paper looks at many things and many different ways to value gold. The idea is incredibly simple: Gold holds its value over the very, very long run. What that means is that the value of gold is not eaten away by inflation, like a paper currency would lose value.

Another way of saying that is that the real price of gold over the very long term is approximately constant. In our paper, we go to great lengths to try to make that case. I'll give you two historical examples.

One of them is from multiple thousands of years ago. There, we determined the price of a loaf of bread in gold at the time of Nebuchadnezzar. Interestingly enough, if you take the weight of that gold back then and you applied the price of today, you get about $4 a loaf. Which is not that far from what you would pay for a loaf of bread today.

The second example is maybe even more interesting. It goes back to Roman times, where it turns out that the Romans kept incredibly detailed records of how they paid their soldiers. Given the number of people that a Roman centurion commanded, it is approximately equivalent to a U.S. captain today.

What we did is we looked at the pay of the Roman centurion in terms of gold. They were paid with coins, and those coins still exist today. You can weigh those coins and you can figure the purity of the gold. We compared the centurion's wage in today's value of gold to a U.S. captain's wage today and found that they were in the same ballpark.

Both of those historical examples corroborate the idea that, over the very long term, the real price of gold is approximately constant.

Let me give you another reason why the real price of gold might be approximately constant; it's kind of like a counterexample. Suppose it was the case that the price of gold goes up through time. Let's say it goes up very modestly—1 percent a year. Given that gold's been around so long, if you compound that 1 percent over, let's say, 2,000 years, you get into a situation that appears to be unreasonable.



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