Calculating how high gold can go is a tricky business

London: When I introduce myself as a commodities reporter, there is one question I am almost always asked: my view on the gold price.

More specifically, the question comes in two varieties: "Is it too late to buy gold?" or "Should I sell the krugerrands, sovereigns and eagles I bought a few years ago that my grandmother left to me?"

The underlying sentiment is the same: after a huge rally in a decade, many investors suffer from a nagging feeling that gold prices surely cannot rise much further.

The question is equally being asked by professional investors after gold's 20 per cent jump since July.

With a confluence of macroeconomic factors pulling in gold's favour and analysts marking up their forecasts across the board, investors are increasingly asking: how high could gold go? Is it too late to get in?

Stab in the dark

The answer will always be a stab in the dark. The preferred method among traders is to look for historical precedents — only problem is, gold has been trading at fresh records ever since it went through $850.

Instead, analysts and gold bugs have been trying to extrapolate from the $850 high touched in 1980 to the possible upside for the gold price today.

The most common calculation is to adjust the dollar gold price for US consumer price inflation. On that basis, the 1980 peak translates to somewhere between $2,400 and $2,500 an ounce — a number that many long-term gold bulls are targeting. Indeed, JPMorgan recently said gold could trade that high by the end of this year.

All-time high

But why restrict yourself to CPI? Adjust by producer price inflation and gold has already come within a whisker of the all-time high: US PPI-adjusted gold record is $1,814, according to Matthew Turner at Mitsubishi.

Adjusted by average weekly wages in the US, on the other hand, the record stands at $2,383.

It is possible to come up with even more bullish numbers: adjust the 1980 peak by US GDP per capita and it translates to $3,377 an ounce, says Mr Turner. Analysts at Citigroup, adjusting by the US money supply (M2), calculate a peak of $3,800.

This is more than just a mathematical game.

Some bold investors are already punting on a gold price spike to extreme levels. In the options market in New York, open interest in December 2011 calls with a strike price of $3,000 currently stands at a relatively high 14,532 contracts.

For December 2012, a few bullish souls are even betting on $5,000 gold: open interest in the $5,000 call contract stands at 189 lots (the premium is $2.40).

— Financial Times