SocGen Explains How To Value Gold And Why You Want To Own It

Societe Generale have put together a report on how to value gold, in comparison with a variety of other assets and market influencers.

The breakdown looks at the relationship between gold and multiple currencies, between gold and dollar debasement, gold and inflation, and gold and the bond market.

For anyone interesting in investing in the asset, the breakdown offers a clear view of the reasons you may want to invest in gold and some of the influencers you need watch before you jump in.

First, here's where we stand in terms of gold pricing. We're not yet at the 1980's highs, in real terms.

Now, reason 1 to own gold: Gold is a hedge against the decline in value of the U.S. dollar.

Note: India, Mexico, Australia, and Canada all have the highest correlations to gold prices in 2010.

Gold mining companies have followed gold prices as well, and many of those are located in top gold price-correlation currency areas.

Reason 2: Inflation fears seem to be rising, as newsflow on the issue increases.

In the U.S., long-term inflation fears are rising, and long-term bonds are already starting to price this in.

This is evidenced in the U.S. bond market's relationship with the gold market, where gold tends to rise with negative real rates in high inflation environments.

But what reason is more important, inflation or the expansion of the monetary base?

It seems as if gold prices have been less associated with the monetary base...

Than rising inflation, which might be a superior valuation metric.

As gold prices rise, the end demand for physical gold declines.

But the market really isn't about physical demand, it's about market speculators.

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