Gold has had quite a run of late.  Since the day President Obama was elected, the price of gold has gone up almost 60%.  It continues to go up daily and many are now concerned that there is a "bubble" being created in the gold market and that the price will soon come falling back to earth.  In an interview with our favorite Telegraph (UK) finance and business writer Ambrose Evans-Pritchard, Stephen Jen of the hedge fund Blue Gold Capital describes why he thinks that is unlikely:

The gold story — essentially — is that the rising economic powers of Asia, the Middle East, and the commodity bloc are rejecting Western fiat currencies. China, India, and Russia have all been buying gold on a large scale over recent months.

Why should that stop when the AAA club of sovereign debtors is pushing towards the danger threshold of 100pc of GDP?

These new players account for almost all the accumulation of foreign currency reserves worldwide over the last five years, so what they do matters enormously.

The reason they are accumulating gold is to catch up with the central banks of Europe and the U.S., who have far more gold in reserve.

After crunching the numbers, Mr Jen found that the share of gold in their reserves is just 2.2pc compared to 38pc for the Old World (perhaps we should just call them the deadbeats from now on). They would have to buy $115bn of gold at current prices to raise their bullion to just 5pc of total reserves, and $700bn to reach just half western levels.

Here's the catch; gold is a very scarce item -- all of the easy places to find it laying on the ground on the surface of the earth have been exploited.  Gold is now something mined mostly from hard rock mines, a dangerous and expensive proposition.  Add on all the environmental permits, bribes to local officials, high royalty and extractive mineral taxes, difficult logistics in very remote places and so on and the supply will not increase quickly no matter what happens to the price of gold.  Which means that even a slight move in the demand side will send gold prices skyrocketing.  China has only 1.7% of its reserves in gold and they have been buying on the dips.  The big surprise is that they did not purchase any of the IMF 403 ton pile of gold so far, only India and Mauritius have hit that bait.   So how should you value gold?

How on earth do we determine what fair value should be for gold? “We have no such concept,” he said. Actually, that is not quite true. You can use the dollar monetary base as a proxy.

Yes, you can.  And that proxy is now up almost 60% since the day President Obama was elected.  Watch the price of gold if the healthcare bill passes, it should move up smartly as the markets assess the amount of dollar printing that will be required to finance an expensive healthcare program for the U.S.