The value of gold

The value of gold

A lot has been written about the gold price in recent days. Much of it has been the usual ex-post narrative explaining exactly why the price has moved in the way it has, including reasons such as: lower expectations for quantitative easing, hedge funds being forced to liquidate leverage positions, the loss of “safe haven” status, etc.

This type of commentary has limited use to us as value investors. What we do find useful is to stay focused on the fundamental principles of investment. That usually means making investments when we have a well founded view that what we are buying is worth more than the price that we are paying for it.

In the case of gold, this is a difficult test to satisfy. It is one thing to identify the factors that might prompt a higher or lower gold price. It is another thing altogether to determine from those factors exactly what the intrinsic value of gold should be.

We note that many people view gold as a store of wealth or as an alternative currency, rather than being a vehicle for investment. This is a legitimate view, although we think that a good store of wealth is one whose price doesn’t change materially overnight.

Returning to gold as an investment – faced with an inability to value gold with any reliability, the logical response may be to decline to invest. The Montgomery Fund and the Montgomery [Private] Fund currently do not hold any gold stocks, but we may change our view if we feel that compelling margins of safety are emerging.

MORE BY TimINVEST WITH MONTGOMERY

Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.