Is Gold Cheap? Who Knows? But Gold-Mining Stocks Are
Growing numbers of investing experts have been declaring that gold is a bubble: an insanely overvalued asset whose price is bound to burst.</br></br>There is no basis for that opinion. And understanding why can help point an investor toward clearer thinking about frenzied markets.</br></br>Sure, gold seems expensive. At its recent price of $1,813 an ounce, gold is off only slightly from the record high of $1,912 touched on Sept. 6 (unadjusted for inflation). Gold is up more than 40% over the past year, largely on fears that paper currencies like the dollar won't retain their value.</br></br>But that doesn't mean it is overvalued. Unlike bonds, which provide interest income, and stocks, which produce dividends and earnings growth, gold generates no cash flows. As John C. Bogle, founder of the Vanguard funds, told me two weeks ago, gold "has no internal rate of return." As a result, there isn't any reliable way to tell what it is worth.</br></br>So the people who say gold is in a bubble might well be right. But the people who think gold is heading for $2,500, $5,000 or $10,000 also might be right.