As Gold Hits All-Time Highs, Valuation Becomes Critical

With gold briefly rallying to just over $3,500 an ounce, the yellow metal finally broke its inflation-adjusted 1980 high of $850. The move has some investors wary of its valuation.

Gold's inflation-adjusted all-time high price was $3,493.95 using the Bureau of Labor Statistics’s consumer price index inflation calculator to estimate the purchasing power of $850 in January 1980.

That it took 45 years to revisit that high is a reminder about valuation. In April 1980, prices fell to about $500 and wouldn’t consistently close above $500 again until January 2006. During that stretch, it traded mostly under $400 an ounce.

Time to Rebalance Gold Holdings?

Michael Wagner, co-founder of Omnia Family Wealth, whose firm has always held a small allocation to the precious metal, has a target weight of 2% to 3%, and given the metal's recent gains, the position can easily swell. The firm uses the SPDR Gold Trust ETF (GLD) and iShares Gold Trust (IAU).

“When you have volatility like this, rebalancing becomes a much bigger part of the picture,” Wagner said. “If you're not rebalancing your portfolio, you're letting the market determine what your risk allocation is.”

Wagner uses gold for its safe-haven role. Right now, they’re more likely to trim their holdings than initiate new positions.

“You want to have the benefit of gold when it does what it's done over the last few years. You don't want to have so much of your portfolio in gold, because it is a commodity. It can have just as violent down swings as it can have upswings. You don't want to have so much of it in the portfolio that can really hurt you,” he said.

What's Driving the Rally?

Central-bank buying has been a hallmark of the precious metal's strength for the past few years and has put a floor under prices, said Kathy Kriskey, commodity strategist for Invesco. 

Ross Norman, CEO of Metals Daily, also suggested that this so-called official-sector buying may be driving the recent uptick as economic uncertainty prevails.

But the fact that gold is rising so quickly rather than acting like “the grown up in the room” with its traditional slow moves higher, is worrying. While he said gold isn’t in a bubble, he is concerned about price action, noting that silver has not yet participated as strongly in the rally.

“For sure, gold is not entirely itself these days in terms of how it behaves price-action wise with regards to traditional drivers,” he said. “But what is clear is it is listening to a different economic drum beat, and that's not always good.”

Editor's note: This article was revised on April 28 with a new quote from Ross Norman.