Gold Price - Where is it heading?

ducati916 · 27 February 2006

Re: GOLD Where is it heading?

Inflation 5yr averages

1926 - 1931...........................(-3%)
1932 - 1937...........................(-1%)
1938 - 1943...........................+2.8%
1944 - 1949...........................+6.8%
1950 - 1955...........................+2.6%
1956 - 1961...........................+2.0%
1962 - 1967...........................+1.6%

Gold 5yr averages

1965 .................................................. .....$36
1960.............................................. ......... $37
1955.............................................. ......... $35
1950 .................................................. .....$40
1945 .................................................. .....$37
1940 .................................................. .....$35
1935.............................................. ......... $35
1930 .................................................. .....$21
1925.............................................. ......... $21

1955.............................................. ......... $35
1950 .................................................. .....$40
1945 .................................................. .....$37

1944 - 1949...........................+6.8%
1950 - 1955...........................+2.6%

Still no evidence of gold reacting, or serving as an inflation hedge.
But, things start to change when gold and the currencies float independantly of one another.

YOUNG_TRADER · 27 February 2006

Re: GOLD Where is it heading?

I'm no expert but a simple look at the gold chart over the year tells me that it moved in a $20USD trade range up to August ($420-$440) then a $40USD trade range up to Novemeber ($440-$480) then a $60USD trade range up to January ($480-$540) which would suggest that so long as it holds above $540USD (ish) its nest trade range should be $80USD giving a target price of $620 USD,

I know this seems overally simplistic, but then I'm a simple person

So I'd say by April/May it should be reaching $620 USD and once it breaks out strongly above that its next target should be $720USD

ducati916 · 27 February 2006

Re: GOLD Where is it heading?

So in 1971 the last link between Gold and the Dollar had gone, and the result inevitable: In February 1973, the world's currencies "floated". By the end of 1974, Gold had soared from $35 to $195 an ounce.
On January 1, 1975 it again became "legal" for US citizens to again own gold. The U.S. Treasury in particular and many other Central Banks sold large quantities of gold in anticipation, making massive paper profits in the process. The move depressed the price of gold, which fell to US$103 in eighteen months.
Gold regained its ($195) December 1974 level by July 1978, hitting subsequently more highs; $250 in February 1979; $300 in July; and soaring from $381 on Nov. 1, 1979 to $850 on Jan. 21, 1980 before crashing and burning for the next 20 years.

Now of course this is where the myth of gold as an inflation hedge was born.
As the currencies floated free from the gold peg, so the financial markets gained another asset class, gold.

That there was once a legitimate correlation between money, and gold, seems simply to have clung on, even though the correlation was broken.
The myth has perpetuated to such a degree, that it is just "common knowledge" currently.

Inflation 5yr averages

1968 - 1973...........................+4.4%
1974 - 1979...........................+8.2%
1980 - 1985...........................+7.2%
1986 - 1991...........................+4.0%
1992 - 1997...........................+3.0%
1998 - 2003...........................+2.4%

Gold Price 5yr averages

2006.............................................. ..........$520
2000.............................................. ......... $272
1995 .................................................. .....$386
1990 .................................................. .....$424
1985.............................................. ......... $354
1980 .................................................. .....$641
1975.............................................. ......... $151
1970.............................................. ......... $38
1965 .................................................. .....$36

Looking at the 1975 - 1980 average of $396 for gold
We see the 1974/1979 5yr average for inflation at 8.2%
The 1926 - 2003 average for inflation at 3.15% indicates that this was a highly inflationary period.

Looking at individual years, taking 1980, we find;

Gold = $641
Inflation = 13%
Stock P/E = 9
1 Year Treasury Bill Yield = 14%
20 Year Treasury Bond Yield = 13%

Across all asset classes there are extremes in valuations.
What would a rational investor think?
He should think;

Stocks look cheap, Bonds look fantastic, and are risk free, inflation looks scary, gold looks expensive.

Therefore it comes down to some simple questions, with complex answers.
Will inflation continue to rise?
If the answer is yes, my Bonds will be decimated.
Will stocks provide any protection against inflation. A provisional yes.
Will gold protect me against continued inflation.....yes.

And therein lies the trap.
The protection is based on speculative money, chasing capital gains, as other asset classes are hurt by inflation in the short term as inflation moves away from price stability.

As inflation via monetary policy reduces, and returns to price stability, so the price of gold drops right along with it.

However, looking at the longer term trends, inflation has been an average 3.15% from 1926 to the present day, if gold was TRUELY an inflation hedge, then, gold would possess an intrinsic value, that appreciated through the years as the value of money has atrophied at 3.15% over the last 74years

Taking the S&P500 at a value of 11.96 in 1925 and todays price of 1289.43
We see an appreciation of 6.43% compounded + 5% dividends = 11.43% thus positive after adjusted for inflation = 8.28% compounded

Gold at $21 to $550 = 4.45% at current prices. Adjusted for inflation, the return = 1.3% compounded.
If we take the price in 2000, then, we are looking at an adjusted return of 0.32% compounded.

In reality, because gold possesses no intrinsic value, and is dependant upon speculative markets for any form of return.
However, during high inflationary periods, when speculative money chases trends, and moves out of other asset classes, the impression is given of gold being an inflation hedge.

Anyway, from that little digression, back to the topic, the future price of gold
Well it will depend upon;
Inflation Rate
Interest Rate
P/E valuations of Stocks
Absence, or availability of other asset classes (Real Estate) which currently seems to be in a bubble of its own.

Therefore we shall examine the fundamentals behind the aforementioned.
jog on
d998

crackaton · 27 February 2006

Re: GOLD Where is it heading?

ducati916 said:
Now of course this is where the myth of gold as an inflation hedge was born.
As the currencies floated free from the gold peg, so the financial markets gained another asset class, gold.

That there was once a legitimate correlation between money, and gold, seems simply to have clung on, even though the correlation was broken.
The myth has perpetuated to such a degree, that it is just "common knowledge" currently.

Inflation 5yr averages

1968 - 1973...........................+4.4%
1974 - 1979...........................+8.2%
1980 - 1985...........................+7.2%
1986 - 1991...........................+4.0%
1992 - 1997...........................+3.0%
1998 - 2003...........................+2.4%

Gold Price 5yr averages

2006.............................................. ..........$520
2000.............................................. ......... $272
1995 .................................................. .....$386
1990 .................................................. .....$424
1985.............................................. ......... $354
1980 .................................................. .....$641
1975.............................................. ......... $151
1970.............................................. ......... $38
1965 .................................................. .....$36

Looking at the 1975 - 1980 average of $396 for gold
We see the 1974/1979 5yr average for inflation at 8.2%
The 1926 - 2003 average for inflation at 3.15% indicates that this was a highly inflationary period.

Looking at individual years, taking 1980, we find;

Gold = $641
Inflation = 13%
Stock P/E = 9
1 Year Treasury Bill Yield = 14%
20 Year Treasury Bond Yield = 13%

Across all asset classes there are extremes in valuations.
What would a rational investor think?
He should think;

Stocks look cheap, Bonds look fantastic, and are risk free, inflation looks scary, gold looks expensive.

Therefore it comes down to some simple questions, with complex answers.
Will inflation continue to rise?
If the answer is yes, my Bonds will be decimated.
Will stocks provide any protection against inflation. A provisional yes.
Will gold protect me against continued inflation.....yes.

And therein lies the trap.
The protection is based on speculative money, chasing capital gains, as other asset classes are hurt by inflation in the short term as inflation moves away from price stability.

As inflation via monetary policy reduces, and returns to price stability, so the price of gold drops right along with it.

However, looking at the longer term trends, inflation has been an average 3.15% from 1926 to the present day, if gold was TRUELY an inflation hedge, then, gold would possess an intrinsic value, that appreciated through the years as the value of money has atrophied at 3.15% over the last 74years

Taking the S&P500 at a value of 11.96 in 1925 and todays price of 1289.43
We see an appreciation of 6.43% compounded + 5% dividends = 11.43% thus positive after adjusted for inflation = 8.28% compounded

Gold at $21 to $550 = 4.45% at current prices. Adjusted for inflation, the return = 1.3% compounded.
If we take the price in 2000, then, we are looking at an adjusted return of 0.32% compounded.

In reality, because gold possesses no intrinsic value, and is dependant upon speculative markets for any form of return.
However, during high inflationary periods, when speculative money chases trends, and moves out of other asset classes, the impression is given of gold being an inflation hedge.

Anyway, from that little digression, back to the topic, the future price of gold
Well it will depend upon;
Inflation Rate
Interest Rate
P/E valuations of Stocks
Absence, or availability of other asset classes (Real Estate) which currently seems to be in a bubble of its own.

Therefore we shall examine the fundamentals behind the aforementioned.
jog on
d998

My Latin aint that hot nowdays...
What's " Multa renascentur quae iam cecidere, cadentque Quae nunc sunt in honore" mean or more to the point what relevance could it possibly have to POG POS and POO?

rederob · 27 February 2006

Re: GOLD Where is it heading?

ducati
The monetization of gold and the subsequent "gold peg" under Bretton Woods until 1971 renders most of your analysis redundant.
Through technological improvements the cost of printing $35 in 1933 was possibly greater than in 1971, while the cost of producing an ounce of gold increased markedly in the same period: Yet the gold peg made them equal for all intents and purposes.
Analysts are only now coming to grips with a new paradigm for gold. It is no longer money, and for only 30 years has it been freely available to the world's wealthiest population. Meanwhile, in the world's most populous nation, gold is just now becoming available for purchase.
So we are facing physical demand factors that for a large part of the 20th century were denied to populations of various countries.
More importantly, the legacy of thought that existed for almost 50 years (or two generations), that is the "gold peg" view that your paper money could be redeemed for gold, has not yet been swept under the carpet.
It may seem to some of us as irrational now, but there is a view that gold could be monetized again, which would mean that the reserve currency in circulation would need to be valued against above ground gold.
These are some of the "speculative" impulses aside from an “inflation hedge” that drive gold higher.

The most important - and least understood - factor of all, however, remains the reason why Central Banks continue to hold gold. This is where GATA enters the door, and opens up a provocative train of thought that needs to be appreciated (not necessarily agreed) by all who wish to follow gold more closely.

rederob · 27 February 2006

Re: GOLD Where is it heading?

Crackaton, you asked what's " Multa renascentur quae iam cecidere, cadentque Quae nunc sunt in honore" mean or more to the point what relevance could it possibly have to POG POS and POO?

You asked a relevant question indeed.
To begin, it's a partial quote from Horace's Ars Poetica. The full sentence of the latin quatation can be translated thus:
Many words shall revive, which now have fallen off; and many which are now in esteem shall fall off, if it be the will of custom, in whose power is the decision and right and standard of language.
Unfortunately, a few words fell off!
That is the exact relevance to POS, POO and POG.

ducati916 · 28 February 2006

Re: GOLD Where is it heading?

rederob

The monetization of gold and the subsequent "gold peg" under Bretton Woods until 1971 renders most of your analysis redundant.
Through technological improvements the cost of printing $35 in 1933 was possibly greater than in 1971, while the cost of producing an ounce of gold increased markedly in the same period: Yet the gold peg made them equal for all intents and purposes.

I am quite willing to accept that.
But I have simply been reviewing the historical context to provide an examination of whether gold has provided an inflation hedge, and why people are so convinced that it does.

Analysts are only now coming to grips with a new paradigm for gold. It is no longer money, and for only 30 years has it been freely available to the world's wealthiest population. Meanwhile, in the world's most populous nation, gold is just now becoming available for purchase.

It is no longer money. True.
And for the majority of that 30 yrs it has been ignored by the general population, as it still is.
Meanwhile in China & India, the current price will exclude 99% of the population, and should it eventually fall to their price range, then they will still ignore it, as it is falling and losing value.

It may seem to some of us as irrational now, but there is a view that gold could be monetized again, which would mean that the reserve currency in circulation would need to be valued against above ground gold.

In the view of whom?

The most important - and least understood - factor of all, however, remains the reason why Central Banks continue to hold gold. This is where GATA enters the door, and opens up a provocative train of thought that needs to be appreciated (not necessarily agreed) by all who wish to follow gold more closely.

This is the third time that you have raised the same point.
If it is the most important, and least understood, where is the argument that would elucidate, and or substantiate your assertion?

jog on
d998

ducati916 · 28 February 2006

Re: GOLD Where is it heading?

Just as an aside, in regards to the gold industry from the producers perspective;

Gold miner Newmont profit falls;

All Reuters NewsNEW YORK (Reuters) - Newmont Mining Corp. , the world's biggest gold producer, said on Monday that fourth-quarter profit dropped due in part to legal settlements and asset write-downs.

Net earnings fell to $62 million, or 14 cents per share, from $190 million, or 42 cents per share, in the same quarter of 2004, the Denver-based company said. Revenue rose to $1.31 billion from $1.2 billion.

Excluding a range of items, the company reported a profit of 35 cents per share, according to Reuters Estimates. Analysts, on average, expected earnings of 34 cents a share on revenue of $1.36 billion.

For 2006, the company forecast consolidated gold sales of 7.98 million ounces at a cash cost of $283 an ounce.

Newmont shares fell 2.8 percent to $56.50 in premarket trading on the Inet electronic trading system.

Newmont's stock rose 13.2 percent during the fourth quarter but underperformed the CBOE Gold Index .GOX, which rose 16.8 percent in the quarter.

ducati916 · 28 February 2006

Re: GOLD Where is it heading?

To provide a valuation on gold we shall use some historical figures;

S&P500 @ 8
Inflation @ 13.7%
Gold @ $850.00...................1980

S&P500 @ 15.98
Inflation @ 4%
Gold @ $550.00..................2006

With the low end of the valuations;
P/E @ 42
Inflation @ 3%
Gold @ $272.00................2000

I put the speculative range at $418.88 to $769.00
So, support, you would *hope* to materialize at $418.88 odd, and Resistance to materialize circa $769.00 odd.

Timeframe...................
Between 5yrs and 10yrs
Based purely on secular cycles.

Within that timeframe, the excesses will have worked themselves out of the system, and gold, for this cycle will again be yesterdays news.

jog on
d998

Wilson · 1 March 2006

Re: GOLD Where is it heading?

Hi Ducati,
If gold has no intrinsic value, why is it under accumulation, world-wide? Do Indians, for example, have this misguided notion ( I think this is what you're saying) that they are taking precautions against inflation as well as saving something of true value? Perhaps 3000 years of 'gold as money' is a mistake and our faith in fiat - now not even a bit of paper, just a blip on a screen - is justified (as well as faith in Bankers, Politicians & Big Business?)

rederob · 1 March 2006

Re: GOLD Where is it heading?

Summarising then for ducati:
He puts the speculative range at $418.88 to $769.00
So, support, he would *hope* to materialize at $418.88 odd, and Resistance to materialize circa $769.00 odd.

Timeframe...................
Between 5yrs and 10yrs
Based purely on secular cycles.

At least we got an answer, so waiting another 5 years won't be too hard now!
Of course, what will ducati do if if gold reaches beyond $770 this year, or next (and I firmly believe it will be "next" year into the $800s)?
No doubt he will revise his figures - but that's just speculation.

ducati916 · 1 March 2006

Re: GOLD Where is it heading?

rederob

At least we got an answer, so waiting another 5 years won't be too hard now!
Of course, what will ducati do if if gold reaches beyond $770 this year, or next (and I firmly believe it will be "next" year into the $800s)?
No doubt he will revise his figures - but that's just speculation.

And as is the want with speculators, they are wrong, as often as they are right. You are wrong. The figures are there, and I have no intention of changing them nor defending them. You see they are a speculative range, and as a speculative range they are as likely to be wrong as right.

If you are right in this case, and they do reach $800+ in whatever timeframe, then you will increase your profits and can claim to be a genius.

Wilson

If gold has no intrinsic value, why is it under accumulation, world-wide?

It is a speculative bubble.
Where it will ultimately end will only be clear in hindsight, that it will end is almost a dead cert

Do Indians, for example, have this misguided notion ( I think this is what you're saying) that they are taking precautions against inflation as well as saving something of true value?

I am not saying gold is an inflation hedge.
Just the opposite, gold is a resounding failure as an inflation hedge, pathetic.
As to Indians, it is partly a cultural phenomenon.

Historically gold has performed best when real bond yields and money market rates were low or negative, which is now the case in most industrialized nations. Gold is a very small market when compared to Bonds or Stocks.

DEMAND SIDE
Jewelry accounted for about 2950 tons
Central Banks in emerging economies + industry 300 tons
ETF's 300 tons
Coins 130 tons
Hedging reductions 200 tons

SUPPLY SIDE
Mining production 2500 tons
Scrap 850 tons
Official sales limited to 500 tons

Total = deficit ~ 280 tons

So, on that basis, can production be increased?
The answer is I suspect a definitive yes.

On the demand side;
Will ETF's require the same amount of gold? Probably not, demand is falling off
Jewelry demand, may fall off slightly due to the high prices
Inter-bank sales will run a production surplus

Therefore, what we have remaining is the hot money.
Hedge Fund money, rotating in and out of hot sectors, chasing the returns.
They could care less about gold, other than, can we make money here. If the answer is yes, and it may still be, then the speculative price will continue to rise.

Europe however is undervalued currently, and you may well see profit-taking out of the gold sector and into Europe (France & Germany), which will cause a collapse in the speculative price of gold.

jog on
d998

wayneL · 1 March 2006

Re: GOLD Where is it heading?

I'd like to introduce a new angle here.

Lets suppose over the next year, some sanity was restored to the world and assets returned to some sort of value...and lets just suppose gold retraced to $300

Let's say we have $50k and the bank is willing to loan us money to buy assets at an LVR of 75%. I don't think interest rate is important for my example, but lets say 7%

We are looking at 3 assets to buy and must choose one. (ignoring transaction costs for the sAKE OF THE EXAMPLE)

1/ An eminently sensible vendor is selling a house for $200,000. We are able to get $270/wk rent a yield of 7% (remember, we are supposing sanity has been restored )

2/ Blue Chip Shares are trading at an average P/E of 8 and the average grossed up yield is 7%. W are looking at buying a $200k portfolio.

3/ or we can buy 666 oz of gold...yield of course, is 0.

All three have potential for capital gain, even another speculative bubble.

Remembering we are gearing here and its costing us $202 per week to service the debt (not including principle payments)

Which of these investments looks the soundest? Which makes the least sense.

Bearing in mind gold has no utilitarian use for us personally. There is no return, we have to store it somewhere. It can be stolen. In a Mad Max scenario, Max and his mates are going to find out pretty quickly that we are paying for our witchety grubs and wild yams with gold coins, and are likely to have a cache of them somewhere.

A 30/30 Winchester aimed at your forehead can be a pretty convincing way to reveal the whereabouts of same.

I have a few obligatory krugerands. But I'd never gear myself up to buy them.

Intrinsic value?

I'm with Duc. It's a great speculative play based on the "perceptions" that it's a hedge. But no long term security or store of wealth value for me.

IMO

Cheers

ducati916 · 1 March 2006

Re: GOLD Where is it heading?

3/ or we can buy 666 oz of gold...yield of course, is 0.

The Sign of Satan

Wilson · 1 March 2006

Re: GOLD Where is it heading?

Ducati,

Perhaps the ‘dead cert end’ of the speculation will be ‘sound money’ based on gold? That will only be after much wailing & nashing of teeth though. Hopefully not your wails nor your teeth..

And yes, the Indians have - according to you - a misguided notion that gold represents a) an inflation hedge and b) something of intrinsic value. It may well be a ‘cultural thing’ and I guess having a culture going back a few thousand years (read the Vedas?) doesn’t count for much? Same with the Chinese, their instinct (a ‘cultural’ thing too?) is that gold is valuable stuff that can’t be fudged, changed to something else with the stroke of a pen or otherwise manipulated. Now that they are off the (true) communist leash, watch 'em go, bro!

The gold market certainly is tiny in comparison with financial (that is lines & rows of digits on a computer) markets. The ‘smart’ money is already moving into gold (so they tell me as I don’t move in smart money circles). Then will come the big funds, then the masses.

This will certainly produce speculation, Ducati, like we’ve never seen before. I don’t know how it will end but I do know on which side of the fence I want to be when it happens. And when it’s over, if I’ve been smart and managed to put away a few gold coins they’ll be worth at least something. Those digits on a computer screen will be worth, well, probably not a lot.

Waynel, I like your examples. Except that if it was me with $50K I wouldn’t gear up to buy anything. I’d buy $50K of gold and sleep like a baby….

PS How do I copy - from an original post - and paste? Tried without success but then I'm technically challenged in more ways than one.

rederob · 1 March 2006

Re: GOLD Where is it heading?

ducati
I am sure you will learn some valuable lessons when you decide to open your mind to other ideas.
In the interim, if you keep deluding yourself that yours is the only path, you will learn very little.
The issue of being right or wrong on the price of gold is of no great consequence to me - I have been right for over 4 years now and know I will inevitably be wrong.
Fortunately the market gives many signals and I can be probably afford to be wrong for a while without suffering any great loss.
Even if I do, there are more important things that concern me and I have the luxury of knowing that money is not one of them.
I have enjoyed seeing you try to come to grips with fundamental analysis of the gold sector and trust your onward journey will be fruitful.
Catch you next year - we wont need 5 years to see your topline figure breached.
All the best.

wayneL · 9 March 2006

Re: GOLD Where is it heading?

Yo!

Down nearly $30 since last Friday, from a lower high. I smell a sub $500 correction.

....and down a dollar and a bit in the time it took to type this.:goodnight

nizar · 13 March 2006

Re: GOLD Where is it heading?

http://www.aireview.com/index.php?act=view&catid=8&id=3692

professor_frink · 13 March 2006

Re: GOLD Where is it heading?

interesting to note how gold stocks have fared today. even though the price was down on the weekend, lhg and ncm have rallied nicely today

nizar · 13 March 2006

Re: GOLD Where is it heading?

professor_frink said:
interesting to note how gold stocks have fared today. even though the price was down on the weekend, lhg and ncm have rallied nicely today

yes unfortunately but not sbm

Gold Price - Where is it heading?

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YOUNG_TRADER

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ducati916

Wilson

rederob

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wayneL

VIVA LA LIBERTAD, CARAJO!

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