Why It’s Impossible to Gauge Gold’s Value
Gold has dropped some 13 percent in two days, the worst two-day drop since 1980, and while some traders say that it's becoming oversold, other say it's just impossible to know. That's because, according to one increasingly insistent group of market thinkers, we simply have no idea what gold is worth.
Doug Kass of Seabreeze Partners Group is among them. "The price of gold is sentiment-driven," Kass wrote to CNBC.com. "When the sentiment turns down, as it has most recently, Katie bar the doors—as there is no intrinsic value support. There is just what people are willing to pay in an auction market."
Of course, this wasn't always so. Before 1971, the U.S. was on the gold standard. That meant that one could sell an ounce of gold to the Treasury for $35—or walk in with $35 and walk out with an ounce of gold. And some want to go back to this system, as Paul Krugman discussed in his recent New York Times column, "Lust for Gold."
"[B]eing a goldbug means asserting that gold offers unique security in troubled times; it also means asserting that all would be well if we abolished the Federal Reserve and returned to the good old gold standard," Krugman writes. He then goes on to argue that the gold standard has not worked in modern times, and that gold price fluctuations have meant that the metal offers no real security.
However, if the fundamental arguments for holding gold are specious, then determining the true value of gold can become impossible. "Like currencies or religion," Kass writes, "you either believe in go(l)d or you don't!"
(Read More: Here's Why Gold Is Getting Crushed)
Some, however, hold a less extreme belief. George Gero, precious metals strategist at RBC Capital Markets, says gold is an effective inflation hedge—but that's about it.
"I think gold is misunderstood," Gero said. "What gold has done is preserve purchasing power, but it is over-owned for a lot of reasons. People have been using it as a stock market hedge and currency hedge, instead of just as an inflation hedge."
So what's happening to all the money that people have parked in gold to hedge against their stock and currency positions?
"I think it's coming out now," Gero said. "It's being forced out."
Gero thinks gold will eventually stabilize, but it will take a few weeks. For now, he says, "Gold has come down through all the technical trends points and stop losses. So we're essentially in a free fall."