Why Gold Is Going To $800

This important chart indicates that gold is ultimately heading to $800. Gold’s relationship with the consumer price index (CPI) is an important measurement of the “fair value” of gold:

Gold and CPI
In a June article, “Gold: Is The Bad News Over?” Mark Hulbert of Marketwatch brought attention to an important measurement of the price of gold: the consumer price index.

According to studies, the historical average price of gold (for several decades) has been 3.4 times the consumer price index (CPI). CPI is also a measure of inflation – often referred to as the “inflation rate” by some economists.

When gold peaked in 2011 just over $1900, gold was trading at 8 times the CPI! It could be argued that this showed gold was extremely over-valued at the time.

The interesting thing is that despite its recent fall, gold is still only trading at 6 times the CPI.

Gold has a habit of returning back to its historical average of 3.4 times CPI. In fact, almost every market has a tendency to return back to its “mean” or “average”.

If gold is heading towards its historical 3.4 x CPI average, that would mean that the price of gold is ultimately heading to $800 an ounce!

Of course, we can never be sure if gold is heading to that level. However, I personally agree with gold billionaire Jim Rogers that gold will not bottom until enough people become scared of gold.

My own personal target for gold is $980 and I will keep buying gold under $1000 until (and if) we hit $800.

Did this article help you? Do you agree with the analysis or do you strongly disagree? Let me know and leave your comment below.

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  1. Totally disagree! Gold is going to $10,000 exactly like Peter Schiff said.

  2. Hi Alessio. If you think it will return to the historical average of 3.4 x CPI ($800) can you explain why you will buying tonnes at under $1000? I presume because you think it will then go much higher than the average? If it does drop to $800 what makes you think it would then increase to much more than the average as if $800 is the historical average it could just as easily go much lower than $800 or just sit at $800 couldn’t it?
    Your thoughts would be appreciated. Cheers!

  3. Question 1: if 3.4 is the historical value of GOLD/CPI, there is not reason to buy gold at 3.4X. If that is the average value, at $800 gold is not undervalued, it’s at its fair price.

    Question 2: what if gold goes at 3.4X not because it falls in price but because the CPI goes up? Almost all major CBs are doing QE. Until now all this money has inflated the S&P and not the consumer good prices, but eventually it may goes out Wall Street and hit Main Street.

  4. Hi Alessio, agree that gold has lower to go but don’t agree with your CPI analysis. Gold is a market like any other. People buy and sell, some are proved right, some are proved wrong. And for bizarre reasons, the gold price is set by and large by the futures markets (yes I know “yawn-price manipulation). I’m a trader like you, and understand the real reason that price bounces from support/resistance is that the big boys do not trade with stops. If they go short en masse, and price makes clear new highs, they wait for price to return to the levels where they went short and close their positions for a minimal loss. It is the ‘buying to close’ that is the hidden force in markets, and one that people do not understand.

    Taking this into account there is a great way to see where gold has to go. Get on thinkorswim-get a free account and load up the futures gold chart. Then load up the volume profile indicator and zoom out to show all data going back years, along with all the Volume Profile data from this eleongated period.

    You will see that a whole bunch of people went short of gold at about $1000 an ounce. So they are still short from this price, and need to get price down to these levels in order to close out their shorts. And I believe they will manage it, and when they do, like you said-that’s the reason to buy, not because of random CPI levels…

    Please keep up the interesting commentaries:)

  5. Hi Alessio,
    As always, thanks for sharing your insight.
    You write you buy Gold below 1000$ and you have a bottom target of (until) 800$; why not waiting until you get a confirmation that the (3yr) downtrend comes to an end before buying.
    Now you focus on a retracement rather than a projection; going long should be based on a projection I think?
    Personally I sold this year 2/3rd of my (very profitable until 2011) physical long position and keep 1/3rd to balance asset allocation. (with hindsight I should have rebalanced earlier)

  6. Stalwart Trembley

    Good point. However which CPI measurement do you use? The “official” CPI figure or the inflation figures supplied by shadowstats.com. There is a vast discrepancy between these two figures.

  7. Hi Kris – good question. Remember that there are different approaches to investing and for entries. A break of a downtrend (or confirmation) is a “momemntum” or “trend” type strategy which is fine. However, some investors (inluding myself) prefer also a value approach. Value investors are not interested in confirmation but they look to buy when a high quality asset becomes extremely undervalued (or at fair value). So both approaches are fine.

  8. Alessio I submitted a post yesterday and it’s not on here-did I break a rule or something? Pretty sure there was no swearing in it-unusual for a comment section…

  9. Excellent post Alessio, thx for the analysis. I mostly use Fib as a reference. Tend to agree the bottom just doesn’t seem to be in yet. Also find it mildly disturbing to keep hearing the neverending stories about masses of Chinese piling into physical on every price slump… the first time in trading history that “masses” of buyers were buying at a bottom? *cough*… I think not. Besides, the “wisdom” of Chinese market participants is playing out in millions of empty flats all across China at this very moment.

    We shall see.

  10. Yes, but you forget that ANOTHER way gold could reach 3.4 x the CPI is if the CPI goes substantially higher. That’s what the gold longs are betting, after all. The reason it’s 6.06 if because gold longs think the CPI will be going up substantially. If so, gold could stay steady or even RISE along with the increase in CPI.

  11. I’m not exactly a market analyst but why exactly do yourself and others believe that gold would return to its 50 year average level?

    Bloomberg have a 30 year Gold-CPI ratio plot on this video at 0:24 ( http://www.youtube.com/watch?v=hBJsdw0O0lE ) which isn’t exactly a steady flat line – I’d probably say that, based on that graph, CPI isn’t a good indicator of the current price of gold?

    Isn’t it possible that there are factors which would contribute to a different overall value of gold which haven’t been around so much in the past 50 years?

  12. I’m not exactly a market analyst but why exactly do yourself and others believe that gold would return to its 50 year average level?

    Bloomberg have a 30 year Gold-CPI ratio plot on this video at 0:24 ( /watch?v=hBJsdw0O0lE – I suspect your comment system will block links) which isn’t exactly a steady flat line – I’d probably say that, based on that graph, CPI isn’t a good indicator of the current price of gold?

    Isn’t it possible that there are factors which would contribute to a different overall value of gold which haven’t been around so much in the past 50 years?

  13. Good point Alfred – but it is not likely. The CPI rising rate would not be substantial to satisfy the gold “longs”. Inflation is still at a very slow rate. And let’s face it, asset values tend to fall much faster due to investor emotions and FEAR. So no – I doubt that CPI would rise fast enough to hold the price of gold above $1000. But we’ll see.

  14. Hi James – maybe – anything is possible. Not everyone of course agrees with this analysis. I think it is a good argument for lower gold prices. Plus the main case for higher gold prices was QE – and tapering of QE this year will remove that case.

  15. Hello Alessio

    Love watching your educational videos and particularly this one on gold. Perhaps gold could drop to $800 as you suggest, but good luck finding any as the Comex price ($800) probably won’t be the same as the retail price (Comex gold price de-coupling from reality). I suppose you could go long a futures contract and stand for delivery at $800 (or whatever price you got on your contract) but it doesn’t necessarily mean that you will get delivery. You might be facing a forced settlement for cash on your Comex contract, as I believe that is now permissible. Also, gold at $800 would probably result in a stampede to the gold retailers, who would be depleted of inventory in probably less than a day. As well, all the Comex gold shorts at $800 would be in terrible trouble as many speculators would stand for delivery, I presume…resulting in a violent whiplash to those same shorts.

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  17. Hi Mike – interesting point and I do see your argument. However, there is one small flaw in your argument, with all due respect. You assume that all investors think the same way and that at $800 everyone will be bullish on gold. I don’t think so. At that point there will be utmost pessimism in the sentiment. So yes professionals will snap up gold – but the majority of the retail investors (who probably are getting slaughtered with margin calls on their GLD long positions) are going to sell or stay away. So yes I do think there will be demand – a huge demand at $800 – but it will be from those who are prepared and ready.

  18. your historical period means which period of time?
    And what about the last 10 years?
    In this environment, do you really want to bet on a return of a mean based on other conditions?
    Truth is gold already rocketed to 1900 as you mentionned simply when USA lost their AAA.
    And it may rocket much higher when the loss of confidence in the fiat currency system becomes terminal.
    You have no way to know where gold is headed with an indicator based on history, when all the conditions are currently changing.

  19. good point hergastul.
    USA loses AAA rating Aug. 2011.
    GLD pops ~ $160 to $180 by early Sept. 2011.
    Then falls back ~ $160 by late Sept. 2011.
    And now sits ~ $127 (at a mid-range oscillation).
    I am reminded of the phrase “sell the news.”
    So what’s the rumor?

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