The global financial markets took a serious hit this month amid the growing fears of the spreading novel coronavirus (COVID-19). However, amid times of economic uncertainty, investors often turn to gold as a hedge to protect their portfolios.
According to one model, the fair value of gold right now should be around $8,900, which is more than five times greater than what it’s currently priced at.
The Lighthouse Gold Model
The price of gold currently hovers at around $1,600 per ounce. This marks an 11% increase in the past six months but a 1% percent decrease in the last month. Given the performance of the global financial markets, gold is seemingly holding up nicely.
However, according to the so-called Lighthouse Gold Model, its fair value is around $8,900 – approximately six times more than its current price.
This was recently brought up in a Twitter thread. According to the model, the work of Eddy Elfenbein, “gold price rises if real interest rates are below 2% (real – 3-month T-bills minus CPI) with 6.5x the difference to 2%. Conversely, gold should fall by 5x the difference if real rates are above 2%.”
It’s worth noting that the T-bills abbreviation stands for Treasury Bills. CPI, on the other hand, stands for the Consumer Price Index.
The post also provides an example with 3-months T-Bills at 0% and CPI at 1.75%, where the real interest rates would be -1.75%. The difference to 2% is 3.75, and in this environment, the price of gold should rise at 24.375% per annum (6.5 x 3.75).
Gold’s Performance Through The Coronavirus Crisis
While it managed to stabilize at the time of this writing, gold also had a very challenging month in March. At one point, it went from a 7-year high at around $1,700 down to $1,490, recording a total loss of 12%.
However, according to popular economist Peter Schiff, this is because investors are simply unaware of what will follow.
Speaking on the matter, he said:
Gold is falling because investors are clueless as to what is coming. Their mindset is similar to that of central bankers. They have no idea how bad the consequences of the current monetary & fiscal policy mistakes will be. When they figure it out en masse, gold will skyrocket.
It’s interesting to see where the precious metal will take it from here as a lot of experts believe the crisis is only just beginning.