[This is not my opinion - I have a differnet view, but thought it was interesting to see an "expert" put it this way.] NL

It's no conspiracy: Gold is just priced right

BRIAN MILNER

Globe and Mail Update

September 6, 2008 at 1:25 AM EDT

You know it was one ugly week in the stock market when the Labour Day holiday turned out to be the only good day for punters, who were forced to do their gambling at casinos, fairs and racetracks. By the close of trading yesterday, the benchmark S&P/TSX composite index had posted its worst weekly showing since the dramatic telecom meltdown eight years ago. Worldwide, equities haven't looked this grim since the aftermath of the 9/11 bombings.

This may not be the ultimate capitulation the professional bears have been waiting for. But for a few hours yesterday, it was enough to stir some life in gold, which has long been the hurricane shelter of choice for those who take a dim view of market, currency and economic prospects and who worry a lot more about inflation than your typical central banker.

That doesn't change the basic story for this most peculiar of insurance policies, one that pays no interest or dividends, costs money to hold and historically has been outperformed by just about any other asset class you can name – from stocks and bonds to antiques. The fact is that gold has been a disappointment for those boosters who were convinced that once it passed the $1,000 (U.S.) an ounce milestone last March, it would surely continue on a steady upward trajectory to $2,000 and beyond.

Instead, it has been hovering just above $800, prompting more than a few gold bugs to dust off their favourite conspiracy theories. Most of these feature plots by central bankers, usually in league with governments and global investment banks, to deliberately keep a lid on their investment of choice.

“Look at the fundamentals,” one heavy gold investor told me recently, pointing to supply constraints, weakening currencies and the continuing woes of the global financial system. “I think gold has been suppressed or manipulated by central banks. They use it as a tool for their market machinations.”

Funny how, in the gold world, it's always fundamentals that drive the price when it's rising, but often some dark conspiracy at work when it's falling.

But here's an alternative for people who like alternative investment ideas: Gold is actually trading close to its proper market value; and its previous runup, like that of potash and several other commodities, stemmed from speculative fever that was bound to break.

That's the considered view of Paul van Eeden, a long-time gold player, who spent years developing a formula to calculate gold's true worth in the market so that he could become less of a speculator and more of an investor.

Gold's current fair-market value stands at about $760 an ounce, says Mr. van Eeden, who is president of Cranberry Capital, a private Canadian holding company. It's a figure derived from looking at U.S. monetary inflation and world gold supply. No other economic or financial issues come into play. It doesn't matter whether the financial system is going to hell in a hand basket or Indians are stocking up on jewellery or central banks are dumping gold in the market.

Simply put, the value is based on the difference between the rate of growth in the actual supply of U.S. money (calculated from raw Federal Reserve data) and the annual rate of growth in the above-ground stock of gold.

Armed with this knowledge, Mr. van Eeden, who trades solely for himself, is neither bullish nor bearish. Nor is he a believer in conspiracies.

“It's too close to its fair value to have a very strong opinion either way. It can trade sideways from here. It can fall further. Or it can rise for psychological reasons.”

He sold all his gold futures when the price hit $975. He still holds actual gold, which he regards the same as cash, without the worry about what might happen to paper currencies. But he will not buy more gold or futures unless the price is at or below what he considers fair value.

Now, he is applying a modified form of his model to other assets such as oil and, soon, copper – all in the interests of becoming more of a value investor and less of a speculator dreaming of big scores and curs