In order to ascertain whether gold is still a good buy, one should ask the followingquestions:
1. Are people overplaying the inflation-hedge aspect of gold?
2. Are people overplaying the economic collapse-hedge (safety) component of gold?
Here is some history on the price of gold over the past 180 years. Overall, the price of goldpeaked at +8,700% since 1833; as of now, gold is up about +7,600%. The price of gold, as with many other financial instruments, was generally stable until about the early 1970s, after which volatility and price appreciation became the norm.
What makes people nervous is the price run-up since 2001. Since 2001, gold is up about 440%, compared to the S&P 500 at 32% and the Dow Jones Industrial Average at about 44%.
Individuals with this "buy-low/sell-high" view should look at the following figure. The figure shows the price of gold, the value of the S&P 500, and the value of the Dow Jones Industrial Average since 1833.
Which asset looks undervalued?
Moving back to the two questions at hand, is it possible for gold to appreciate under low, stable prices and moderately growing economies? Let us look at the inflation aspect first.
The chart below shows the price of gold against the estimated worldwide money supply.
Why consider money supply? Because money supply is the one variable that is almost always associated with high inflation rates. Do the two - gold and money supply - look correlated? They are. The price of gold and the growth in worldwide money supply show a direct correlation with the exception of 2013.
For one to argue that the price of gold will continue to depreciate while the world's money supply continues to increase at an exponential rate is foolish, unless one believes that governments will curtail money supply growth.
Now, to answer the question, can the price of gold depreciate when inflation is low? This is actually what has happened over the past 10 years.
What about expected inflation - can gold depreciate when expected inflation is low? Simple answer: as long as governments continue to control the money supply, expected inflation is unlikely to remain low for a long time.
Moving on to the second question: can moderate economic growth coincide with gold price appreciation? Well, the easy answer is no, at least not in the short-run.
The question gold bears must answer though, is this: How long can economic growth remain "moderate"?
Generally, moderate growth is not the norm when it comes to economic growth. Economic growth is like an old time railroad, full of thrilling bursts of speed and quick stoppages. Essentially, the business cycle is full of acceleration and deceleration, not constant acceleration. Constant acceleration can only last a little while, and gold generally does well in the other two environments.
Overall, investors are probably overplaying the inflation-hedge and economic-collapse aspects of gold. Gold is likely to continue on a strong long-run path of price appreciation as long as governments continue to control the money supply and/or the business cycle continues to be a real aspect of an economy.