What Is the Gold and Coin Price Bubble and How Is It Calculated?
You've probably heard the term “bubble” used when talking about asset prices. In this article, we’ll explain what a price bubble is and how to calculate the gold and coin bubble using real numbers.
What Is an Asset Bubble and How Is It Calculated?
A price bubble is the difference between the intrinsic value of an asset and its current market price, caused by various factors like supply-demand imbalance or market sentiment. For example, if the actual cost to build one square meter of a house (including land, construction, permits, inflation, investment return, and builder profit) is less than the selling price, the difference is called a housing price bubble.
If the market price is below intrinsic value, it’s a negative bubble; if it's above, it’s a positive bubble. Economic theory suggests that prices can deviate temporarily but will eventually converge toward intrinsic value. Knowing and calculating this bubble accurately helps in long-term investments.
For instance, if housing prices are below intrinsic value, developers will stop building. Supply drops, demand rises, and prices return to intrinsic levels. Similarly, if prices are inflated, new builders enter the market, increasing supply and pushing prices back to fair value.
Gold and Coin Bubble
Based on the above definition, we must find the intrinsic value of gold and coins. Globally, it’s difficult due to factors like demand for jewelry, availability, and monetary policy. In Iran, intrinsic value is often calculated as the cost to import the gold using the dollar exchange rate. The difference from the market price is called the gold bubble.
In recent years, the minting cost has become negligible. The Central Bank no longer publishes it, so we assume a fixed estimate of 3,000,000 IRR per coin in this article.
Calculating Coin Bubble
Each Emami or Bahar Azadi coin equals 8.1333 grams of 90% pure gold (21.6 carats). Using this and the USD/IRR rate 1,197,000 and gold ounce price 4,224.80$:
- Bahar Azadi Coin: 1,213,000,000 IRR → Bubble: 1,985,280 IRR (1.66%)
- Emami Coin: 1,273,000,000 IRR → Bubble: 7,985,280 IRR (6.69%)
Bubble of Common Gold Types in Iran
Based on the weights, purity, and intrinsic values, with USD/IRR rate = 1,197,000 and XAU = 4,224.80$ USD, the table below summarizes:
| Name | Weight (g) | Purity | Market Price | Real Value | Bubble |
|---|---|---|---|---|---|
| Emami Coin | 8.1333 | 0.9 | 1,273,000,000 | 1,193,147,200 | 7,985,280 (6.69%) |
| Bahar Coin | 8.1333 | 0.9 | 1,213,000,000 | 1,193,147,200 | 1,985,280 (1.66%) |
| Half Coin | 4.066 | 0.9 | 667,000,000 | 597,978,500 | 6,902,150 (11.54%) |
| Quarter Coin | 2.032 | 0.9 | 376,000,000 | 300,342,900 | 7,565,710 (25.19%) |
| 18-Carat Gram | 1 | 0.75 | 122,880,000 | 121,941,800 | 93,820 (0.77%) |
| Mesghal | 4.6083 | 0.705 | 532,300,000 | 528,227,800 | 407,220 (0.77%) |
Conclusion: The data shows most coin types have a positive bubble, while lower purity gold (e.g., 18-carat) is closer to intrinsic value. For long-term investing, knowing the bubble helps you make better decisions.
Commenting
Write your comment (your email will not be published)
Recent Comments (1comment)