Gold Is Undervalued in Fiat Money Terms

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The question on everyone's mind is whether or not the gold bull market is over? Such an utterance seems glib in the face of 8,000 years of history that suggests otherwise. Of course, there is a time and moment to own gold. That time is still now. So you will not be surprised to hear us say, no it's not over; it's just getting interesting.

Another question that is on everyone's minds—or if it isn't, should be—is, was the gold market sell-off a product of continued and escalating manipulation?

(Read More: Is Gold's Tumble a Signal to Sell Stocks?)

I will explore the answers to both these questions, and by understanding reality we can begin to understand whether gold can reassert itself in its justifiable role as an antidote to the current fiat currency system.

Is Gold Currently Undervalued?

First off to state publicly, gold is still undervalued in 'fiat money' terms, that's the easy question to answer.

People have said to me gold has gone up a lot, and so now it's too high. I always reply that gold has a price and a value. These two constructs are not interchangeable. Price is a level at which you make an exchange, and value is whether it is worth it. Right now gold remains undervalued when examined in the context of other assets, primarily against paper money.

To illustrate this point we can now see how gold is as undervalued, incredibly, as it was in 2000, just before this gold market began to rise in nominal terms.

One phrase that sums up my thinking – price has changed, but nothing has changed.

To develop this statement a little further, I want to quote a friend, Detlev Schlichter, on the recent brutal bloodletting in the gold market. Detlev wrote a really eloquent book Paper Money Collapse, about the inevitable failure of paper money economies. He states:

"After 40 years of relentless paper money expansion and in particular 25 years of Fed-led global bubble finance, the dislocations in the global financial system are so massive that nobody in power dares to turn off the monetary spigot and allow market forces to do their work, that is to price credit and to price risk according to the available pool of real savings and the potential for real income generation rather than according to the wishes of our master monetary planners."

This fact remains, so nothing has changed.

Ben Davies is CEO and founder of Hinde Capital, a U.K. alternative investment management company with a specialist gold fund. You can read his latest investor letter here.