Given the extremely high correlation between central bank balance sheets and the price of gold, it is possible to determine the implied price relative to current debt levels. In doing so, we calculate gold's "central bank balance sheet value" at around $1900 an ounce.

Gold has had quite the wild ride over the last nine months in which we've seen several triple-digit swings. It had a quick and sharp bear market last September with a 20% decline followed by an 18% snapback rally into November and then a 15.5% decline into the end of the year. Then, gold’s volatility carried over into 2012 as it rallied from December 2011’s low to a high at the end of January for a 17.6% positive swing. Lastly, we witnessed yet again another triple-digit swing when gold declined to the March 14th low of $1634.53/oz for nearly a 10% correction.

Right now, we have the second most oversold reading since 2008 and, as of yesterday’s low, gold appears to be selling at a discount of $255/oz to its average price. Thus, as I show below, gold investors are currently presented with yet another oversold and undervalued buying opportunity.

Second Most Oversold Reading In Four Years

Our firm has developed a technical indicator for gold based on several variables which we aggregate and then convert to corresponding z-scores (or standard deviations) to get a statistical reading of how overbought or oversold gold is relative to its historical performance. As shown in the figure below, gold is one standard deviation below its 12-year average (average taken over gold’s secular bull market) which is the second most oversold reading since 2008. Readings below -1.0 have often marked significant bottoms and the current reading should be seen only 15.9% of the time or, conversely, readings above -1.0 should occur 84.1% of the time.

Source: PFS Group

Gold Selling for a $255/oz Discount to Theoretical Price

Because gold is no one’s liability and can’t be created out of thin air like fiat currency, it is seen as a store of value and a hedge against global currency debasement. Gold has served this role exceptionally well over the last several years which has seen trillions upon trillions of dollars dumped into the global financial currency pool.

Proof of gold serving as a hedge against currency debasement is well illustrated in the graph I present below, which plots reserves for the five biggest global central banks (in dollars) alongside the price of gold. As you can see, the correlation between the two is unmistakable.