With so much talk of potential devaluation of major currencies through Quantitative Easing (QE), we need to find alternative investments that cannot be devalued by fiscal policies, and so have asked our new recruit to the Fish Investment Analyst Team for his views; Dean Morris is a Certified Financial Planner based in South Africa and we refer to him as our “Walking Encyclopaedia”; he admits to having read over 150 books on economics, tax, psychology, history, energy and geopolitics!

Q: Do you think Gold is undervalued, fair value, or overvalued ? 

Definitely undervalued. None of the major currencies have an intrinsic value as they once did when they were linked to a gold standard. As a result their ‘store of value’ is questionable because the supply of these currencies is adaptable to the needs of the monetary authorities. We are used to the hyper-inflation/devaluation stories of third world countries but the recent QE experiments in the US and UK demonstrates the flexibility and risks of printing presses.

I believe all “fiat” currencies, as they are called, are vastly overvalued compared to gold, and the investing public will be clamouring to get in to gold. Remember also that there are now 3 billion people in Asia who now have access to funds (unlike in the 1970s gold bull run) and these people don’t share the predominant western view that gold is an old relic. 

Source: flickr- Rodrigo Marin

Q: Do you prefer physical gold or a basket of gold mining stocks ?

Both. They are very different animals. Bullion itself will provide you with relatively safe storage of value (relative to ALL fiat currencies). The gold price can move 30% in a short space of time, so those investing in gold must be aware of such moves; individuals must be emotionally prepared to deal with that kind of volatility. Exchange Traded Funds (ETFs) are the most practical way to obtain exposure to physical gold but care must be taken to understand the different types of ETFs.

Gold stocks represent a proxy multiplier to gold. The largest input cost into a gold mine is energy, so when the gold price moves up and settles on a new average price, the additional revenue can far outrun the increase in input costs. However, they are stocks and subject to the same risks as other stocks.

Gold stocks chosen on an individual basis can lead to major loss of capital. Thus, unless you have both the time and inclination to investigate the fundamentals of individual stocks, a gold mining focused mutual fund is probably the safest option.

 
Q: How long do you think this bull market will go on for?

Another 5 years, minimum. Looking at the history of bull markets, they usually last for 17 to 25 years. This gold bull market started in 2000, so as of now (2010) we’re probably at or just over the halfway mark in time, and much lower in terms of returns. I believe the exponential stage of price rises still lies ahead.

 
Q: What price target would you place on gold and why ?

Higher, much higher, compared to all currencies. I’d say conservatively, US$4000/oz. Too much more Quantitative Easing along with the public becoming aware of the declining value of their ‘money’ and it could be multiples of where it is today.