From Hulbert on gold 3/29/13
Consider: Investors who bought gold at its January 1980 peak of $875/oz are today still below water in inflation-adjusted terms. They even were showing a loss two years ago when gold was trading for more than $1,900.
The investment implication is to pay careful attention to gold's longer-term cycles before buying gold—or be willing to hold it for many decades.
So how should you decide where gold is in its long-term cycle? As a rule of thumb, the researchers urge investors to calculate a ratio of gold's price to the level of the consumer-price index. This ratio's historical average has been about 3.4 to 1, so it is a good bet that gold is overvalued whenever the ratio is well above that level.
When gold hit its high over $1,900 an ounce in September 2011, for example, the ratio was more than 8 to 1. In January 1980, the ratio stood at more than 11 to 1.
Unfortunately for the gold bugs, the current gold/CPI ratio—5.3 to 1—is still above average, even in the wake of gold's plunge over the past three months. To be in line with that average, gold would have to trade for $780 an ounce.
