Gold Price - Where is it heading?

[ducati916]

Re: GOLD Where is it heading?

rederob

I am awaiting a more definitie analysis from ducati, of course, so that I can be more expansive on reasons why.

Well, here you go then, excuse it being a little disjointed as I have just copied and pasted my posts from Reef.

S1


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Let's get to Gold and indeed other metals for a moment and let's relate it for the moment to the comment I made about Spring 2003. Why did I pick that date ?

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Ok,


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Competing asset groups and alternative costs.Gold itself unless invested in Gold shares provides no revenue stream.
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Agreed, gold as the physical provides only capital gain/loss.


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Consequently when placed against risk free returns there is an alternative cost to holding Gold immediately. The higher the return on risk free 'cash' , fixed bonds the higher the loss on holding Gold.
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Correct.
Therefore, by that reasoning, as yields rise on Risk Free asset classes and capital gains on physical gold parabolic............what remains to drive further speculative except the public?


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It was probably unavoidable that as the trend in 'cash' returns dropped increasingly from the end of the 90's to the recent lows money would flow from 'cash' to Gold

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Correct.
However at that point, the price of gold, while off the lows of 1999 at least had a semblence of logic............currently, speculative fever drives the market, bubble territory. It will crash, just when.

The only fundamental value for buying gold the physical is the belief that gold offsets inflation. Therefore to realize that effect, if it actually exists, is to buy at the correct price........the correct price most certainly is not $500+


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In this sense Gold becomes attractive regardless of whether the next step in returns on 'cash' are deflationary ,or indeed inflationary in a global sense.

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Disagree.
Gold is only attractive at the correct valuation to parallel inflation. This due to the current excess in speculative activity has broken the link.


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Why might the Asians put their money in Gold and indeed other metals. This is business. We have already said at some point they play a long term game. Intrinsic in that will be their willingness to hold metals essential to their growth prospects.
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Which is precisely where the whole argument breaks down. If the Asian are as canny as you suggest, their Central banks will not be buying gold at these levels, they will understand prices are cyclical, and a bust will follow the boom.........therefore, sit and wait for the bargains.

The retail market for gold, India, weddings etc, will be driven by price.........high price, lower demand, lower price, higher demand.
Preliminary data is already indicating that the retail market in India, far from being net buyers, were actually net sellers.

Save for this market, viz. jewelry, gold is a useless commodity, having very small overall demand.

Copper, on the LME, has also gone parabolic.
Again, demand from producers is not driving the price, speculative liqudity has distorted a possibly genuine increase in demand from producers, to mayhem.

The instability of raw materials prices has been with us for at least a hundred years.
The chief harm to business in depressions and recessions, comes not from ordinary operating deficits, but from inventory losses due to the collapse in price.

These price collapses, while damaging to all producers, are especially damaging to producers of raw materials, copper, coffee, gold, beef, etc.

Furthermore, it is this price instability of the primary raw materials that antecedes and induces later price instability of produced goods.

Most serious is the effect of price instability on countries chiefly dependant upon pricing power in raw materials. The reduction of national income and the impairment of living standards of the population are damaging. Consequences include; defaults on foreign debt, severe reduction in imports of manufactured product, new trade restrictions, and depreciation of the currency.

What % of GDP are resources in Australia?
We are starting to see it in NZ, and hell, they only have sheep and milk.

The US, by comparison, is far larger a producer of services. The commodity that hurts them of course is oil, but the effect of other commodity prices reduces year after year as increasingly manufacturing is moved off-shore.


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We are therefore in a circular issue which inevitably comes back to US consumption and it's contribution to World growth rate. If it's dips significantly the risk to every the World economy is great. In circular fashion this brings us back to will the Fed let this happen ,or will they print money gradually to prop up this consumption and if they do who's buying and what rate.

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Exactly so.
Now, although the US will hurt, it will hurt less than others. The law of the jungle.


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It's a very tricky problem propping up consumption under these circumstances and the uncertainty of that whist it remains will in my view continue to drive Gold. I just cannot see this being resolved quickly hence my interest for the next few years ,or until I see some reduction in the level of uncertainty surrounding the US.

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If the US goes protectionist, and Congress is currently full of protectionist advocates, then again, the US will hurt, but other areas of the world economy will really, really hurt.

War has always driven throughout history a boom/bust cycle. With the current war, and potential wars in the making, again, boom/bust cycles are in evidence..........

 

[ducati916]

Re: GOLD Where is it heading?

S1


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Actually my brother misunderstood me on this as well. What I was saying is essentially this. Gold is another currency more than it is simply another commodity.

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Disagree.
Gold & Currency are both commodities
Simply they are the commodity of transaction. Gold failed as the commodity of transaction as it was contractionary.......it's physical production was finite, or at least limited in specific timeframes.

For an economy to grow, the medium of exchange must be able to grow as fast, or faster, than GDP, else, overall expansion must be limited by the availability of the liquidity of transaction, via the creation of credit.


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As for what is the fundamental value of gold you're wasting your time at the moment.It's fundamental value as an alternative currency is incalculable. It's fundamental value as a commodity is a different question,but at the moment it's value as an alternative currency is what we are seeing and speculating on.

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Disagree.
The fundamental, or intrinsic value of gold is pretty close to zero. Historically the fundamental value has linked itself to inflation, but again, it really depends on which timeframe you measure it on.

Gold from 1921 to 2006 = 3.5% inflation rate
Gold from 2000 to 2006 = 16.1% inflation rate
Gold from 1980 to 1999 = (-4.5%) deflation rate

If you had measured your holding point from 1980 and ended in 1999, you would have lost ground badly against inflation by 8% compounded....thus even the inflationary argument for twenty years held no water.

Gold, as N40K alluded, is a speculative medium, nothing more nothing less. Currently it has been hot for 5+yrs.........how much longer, higher?


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The line between fundamental and speculative values has given people problems from time immemorial which is why we get this cyclic effect of overshoot and undershoot. What we do know though is that it becomes more pronounced in times when liquidity is high and boy as it been high.
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Agreed.
Therefore, the question again becomes; in contractionary environments, which asset class, or investment philosophy can be utilized safely (relatively speaking) with an expectation of ultimate success? What is a true inflation hedge?


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The rate at which that takes place will determine where the line between fundamental values and speculative values is drawn, but as usual it will highlight assets values on a scarcity basis.
I won't argue with you over the metals group and how supply & demand will effect their pricing. Just remember though ...all asset groups at the moment are overvalued so which of the main groups are the most scarce is what we are really talking about here.Which are going to be the most sticky in terms of giving up their over valued element?

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If you cannot value the asset, you are then by definition speculating.


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Volatility is a function of uncertainty as to fundamental value and excess liquidity is a precursor to the aforementioned...simple as that ..
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Agreed.
Speculators create volatility, as they by definition do not calculate the value, utilising the marketability to create increased liquidity.
Investors, recognizing value, start to remove the liquidity.

jog on
d998

 

[ducati916]

Re: GOLD Where is it heading?

S1


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Looking at the timeframes you have used is a wee bit deceptive. I don't know if you chose them specifically for that purpose. Try 1970 to 1980. Try 1930 to 1940. There are times and those are two when preceding rapid expansion in liquidity forced a contractionary reaction of same. At that time values of paper currency were extremely volatile and in effect gold was bought for it's stability. Vice a versa ...as the volatility of paper money stabilised so did the value of gold drop. In essence you are valuing the relative volatility of two mediums..paper currency and gold.

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Nonsense.
In 1930 the US, and many of the major economies were tied to the gold standard, in which the *value* of gold was *fixed*

Countries that abandoned the gold standard in 1931 included; UK, Japan, Germany, Canada, Sweden, Norway, and several others.

Countries that abandoned gold standard in 1932;
USA, Rumania, Italy

Countries remaining on gold after 1936;
France, Netherlands, Poland

After 1936 with the dissolution of the gold standard, and the advent of WWII, the final effects of deflation and depression were erased.

Gold is, and has been since the advent of global trade contractionary, which is why it was finally laid to rest in Nixons presidency on Aug 15 1971 as he closed the gold window.

In the years 1930 - 1940 therefore the official rate remained at $35.00oz, and speculation in private markets may well have fluctuated, but nothing worth getting excited over.

US Treasury rates were at;
1930 - 3.29%
1931 - 3.34%
1932 - 3.68%
1933 - 3.31%
1934 - 3.12%
1935 - 2.79%
1936 - 2.65%
1937 - 2.68%
1938 - 2.56%
1939 - 2.36%
1940 - 2.21%

From which we can postulate that with interest rates low, and falling, under monetary policy, no longer linked to gold, that the conditions were designed to be inflationary due to the preceeding depression and deflationary environment.

Inflation measured by the CPI was still deflationary, returning (-2.05%) Therefore we can see the logic in the falling interest rates.
Stimulus was required to jump start the economy.


Further, we can state that as the price of gold was fixed at $35oz, speculating in gold was a quick way nowhere returning 0.0%

Holding cash (currency) would have returned you in this time period 2.05% therefore.

Holding cash equivelents, viz. Bonds, would have returned you at best, 5.73% at par, at worst, 4.26%

Moving to 1970 - 1980

Bond rate;
1970 - 7.72%
1971 - 5.11%
1972 - 4.69%
1973 - 8.15%
1974 - 9.87%
1975 - 6.33%
1976 - 5.35
1977 - 5.60%
1978 - 7.99%
1979 - 10.91%
1980 - 12.29%

Inflation measured by CPI = 7.42%
Price of Gold = +34.46%

Here we can see that, with high inflation, rising bond yields......that indeed gold was the place to be.

Gold would need to have been purchased at the low of $34.91, and sold at $675 or higher.

So gold was stable in 1930 to 1940, as of course it was fixed. It was most definitely not *stable* in 1970 to 1980, displaying one of it's most volatile periods in history, it then of course plunged into the grave for 20yrs, again with high volatility.

It is, as N40K reiterated, purely a speculative medium. It's value is psychological in nature, it has to be, because it is not linked to currency, which is the *official* medium of transaction and nominal *wealth*

Currency, is a speculative medium, it is the medium of exchange, as transactional power rises and falls within an economy, so the value of the sovereign medium of transaction will adjust.


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"thus even the inflationary argument for twenty years held no water."..that was not "inflationary". 1970 to early 1980's were inflationary as a result of the prior expansionary decades 50's & 60's...inflation was basically contracting thereafter albeit from a very high starting point.
Hence it was not surprising that gold lost value against paper currency over that period. Paper money was in effect becoming comparatively more stable hence gold lost it's attraction.

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Nonsense.
Lets then look at 1980 - 1990

Bond rates;
1980 - 12.29%
1981 - 14.76%
1982 - 11.89%
1983 - 8.89%
1984 - 10.16%
1985 - 8.01%
1986 - 6.39%
1987 - 6.85%
1988 - 7.68%
1989 - 8.80%
1990 - 8.40%

Inflation measured by CPI = +5.05%
Gold = (-4.86%)

Again we see that holding gold, in an inflationary period was a disaster. Bonds, even in a high period of inflation would have been far more attractive.

Price, and the price you pay delivers your investment returns.


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So the liquidity was to some extent unforeseen. As a consequence we have seen increasing volatility in paper currency and growth in asset values. In turn we have seen increasing interest in gold for it's relative stability.
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The price of gold has been anything but STABLE it has been on an absolute run. To the point where you have to start asking, are the psychological catalysts driving the price going to remain in place?

Are alternate asset classes undervalued, even relatively by comparison to gold?
If so, might it not be an idea to think about moving from a bubble, to something hated?

At current prices, in REAL terms, rather than nominal terms, the BET is on the further fall in the US$, due to increasing inflation, with kind of middle of the road bond yields.


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We should have had a recession back around 2002/3 .We didn't get it ,because liquidity was thrown into the market place specifically to prevent it.That took a double whammy as the Fed did not account for the effect on liquidity that would arise from the recent opening of markets to the cheap goods coming in from the East.
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Disagree.
The Bureau of Labour has been systematically under-reporting the effect of imports from the East. It would seem that they wanted to reduce the liquidity engendered in large part from Japan and their systematic flooding of the world with ultra-cheap currency to dispel their contractionary, deflationary economy.

The liquidity cushioned the 2000 - 2003 market crash, but inflated other bubbles, housing and commodities.......that are now exactly where?

A commodities crash will hurt no-one in the short-term save the speculators on the wrong side of the trade, if taken too far, producers will suffer also, thus eventually leading to economic effects.

A housing crash will have potentially greater impact in the short term, as consumers will be caught with everyone else.......

Just returning to gold, producers are *speculating* with everyone else currently, as they have removed all their production hedges. Some serious selling will take place when the producers lose their nerve and try to lock in forward sales. Of course the lack of production hedges has allowed the price to go parabolic..........

Which brings us back to the current time frame;

2000 to 2006
PPI from 1921 to 2006 = 2.4%
PPI from 2000 to 2006 = 4.5%
PPI from 1980 to 1999 = 2.1%

CPI from 1921 to 2006 = 2.8%
CPI from 2000 to 2006 = 2.8%
CPI from 1980 to 1999 = 4.1%

Gold from 1921 to 2006 = 3.5%
Gold from 2000 to 2006 = 16.1%
Gold from 1980 to 1999 = (-4.5%)

The argument would seem to be, that gold in percentage terms is only at 50% of it's high point return, inflation is only at 50% of it's high point (measured by PPI) and hey, it'll go to 100% and bonds are only at 50%'ish of their highs.

Back to the old 50/50 ratio.
50/50 odds just are not enough.

jog on
d998

 

[rederob]

Re: GOLD Where is it heading?

ducati
Thank you
Do you want to summarise, or shall I take you out of context?

 

[ducati916]

Re: GOLD Where is it heading?

rederob

No, you can take me out of context, I'll pick it up where you leave off.
But basically, I don't like gold at these levels.......they are pure speculation, there is no fundamental justification for them.

jog on
d998

 

[rederob]

Re: GOLD Where is it heading?

rederob

No, you can take me out of context, I'll pick it up where you leave off.
But basically, I don't like gold at these levels.......they are pure speculation, there is no fundamental justification for them.

jog on
d998

Thanks ducati
Essentially ducati has no ability to forecast a price for a speculative commodity that fails his views of what the correct price should be.
Whereas I trust the market to work its magic and skew logic to buggery.
So in this illogical world, people are not trusting fiat currency, but are looking at alternatives, such as gold.
As the price of gold inflates, the implied trust of the masses in gold as an alternative currency increases: We have a self fulfilling prophecy until gold goes parabolic and collapses on itself.
In the meantime, people like me and thousands of others work out that there are lots of ways to make money, including relying on the fear and greed of the masses - whoa boy, that's speculation!
Oddly enough, speculation might not pay dividends, but it can pay the bills better than dividends when one is on the right side.
Right now I think gold at $1000 is very achievable next year, but not this one.
Right now I would prefer a greater correction, and a longer consolidation than a few days!
Right now I reckon this market does not give a toss about my view, or ducati's.
And in time we will see if ducati's logic holds up and the gold price falls into line, or if we are looking at a $1000 party in 2007.

 

[nizar]

Re: GOLD Where is it heading?

agree rederob

a few weeks consolidation and even down to 600-620 would be nice

historically, gold has always been a better performer in the 2nd half of the year, and i dont see why it could be different this time

IMO... by end of december we will be very close to 1000

after this rally resumes, maybe next month, next point of resistance will probably be 850, and then off to a G

 

[LPA]

Re: GOLD Where is it heading?

Right now I reckon this market does not give a toss about my view, or ducati's.

This is how I've been feeling lol....I second that cynicism!

 

[clowboy]

Re: GOLD Where is it heading?

LOL

Yea sux when the market does not listen to what you say.

It's like a child, always thinks it knows best.

 

[rederob]

Re: GOLD Where is it heading?

agree rederob
a few weeks consolidation and even down to 600-620 would be nice

nizar
POG raced up $30 after our markets opened today and have had an intraday peak of $718 - presently back at $714.
Silver followed suit and broke over $14 before settling at $13.90 for time being.
Is the correction over?
If we took a cue from base metals, then the answer today is yes: Already at LME the average increase is around 1.5%, except for zinc which is up 5%: This comes on top of a modest rally last night.
Am hoping we just see some consolidation below previous highs for a while before breaking out again, just to put a bit of zing into the next upleg.

ducati
Your reply, while elaborative, has not forecast an actual price into the future (unless it was hidden somewhere).
I think it is impossible for you and I ever to agree on what value, price or influence gold has on people or markets.
However, I see commerce/finance as an opportunity to exploit opportunities rather than hide under a bushell.
Accordingly, I will remain overweight commodities and reduce my bias in gold to unhedged producers: The present phase of the gold bull is where the big money will be made, and hedges crimp potential gain.
C'mon ducati, what will it take for you to have another go?

 

[Sean K]

Re: GOLD Where is it heading?

I would also like this to consolidate for a bit longer rederob.

If it climbs immediately it's destined for an even harder fall.

I'd have to consider cashing in a few things if it takes off again.

 

[wavepicker]

Re: GOLD Where is it heading?

I would also like this to consolidate for a bit longer rederob.

If it climbs immediately it's destined for an even harder fall.

I'd have to consider cashing in a few things if it takes off again.

Interesting to see where gold may go from here Kennas. As you know I have already cashed in my bars, however I am planning on buying again in the years ahead as golds secular bullmarket is far from over in my opinion.

I beleive in order to get some clue of things to come then we must first look at the big picture. A long term chart of gold, the 30 Yr chart. As can be seen price fluctuations are contained within 2 curvilinear constant width envelope bounds. An outer envelope(lower and upper blue lines) and an inner envelope bound(upper and lower green envelope which itself is bound by the outer envlope) My envelope drawing is a bit rough but you can see that gold has come up against overhead resistance where price is touching the inner upper bound (green line) at this time. As price vibrates(oscillates) between one extreme to another of the inner bounds then the next logical long term move would be a correction back to the $500 level in the years ahead followed by a massive rally to over $1000.

At the bottom of the chart it is quite clear the gold follows an 8.5 year cycle from low to low. Within the 8.5 year (102 months)cycle there are 3 smaller cyclicalities of 34 moths each. The last 8.5 year cycle bottomed in April of 2001. This means we 60 months or > half way along the 8.5 years cycle which means this cycle is now pointed down. The last 34 month cycle last bottomed 14/05/04 and is due to bottom early next year. We are 24 months along this cycle it too is pointed down.

Thus all cycles are pointed hard down until 2009. That is why I made the decision to liquidate and hold off for the time being. Right or wrong I have made my decision based on this evidence.
Remembering of course that cycles are not exactly accurate and they can change phase, but at present it makes sense to me to be out both from a technical perspective and a sentiment one as well.

Cheers

 

[Sean K]

Re: GOLD Where is it heading?

That is a very interesting chart wavepicker.

You are right though, it's not an exact science, but it will be interesting to see if this unfolds something like this, with higher or lower peaks and troughs in the cycles.

I'll be looking for that low point in the 8.5 year cycle in 2009!

 

[RichKid]

Re: GOLD Where is it heading?

.......

I beleive in order to get some clue of things to come then we must first look at the big picture. ...............
Remembering of course that cycles are not exactly accurate and they can change phase, but at present it makes sense to me to be out both from a technical perspective and a sentiment one as well.

Cheers

Very refreshing to see a different perspective, thanks wavepicker, please keep us updated as things change.

 

[LPA]

Re: GOLD Where is it heading?

Gold seems to have found at least some level of support at the 680 mark. Hopefully it will remain in the 660 - 700 range for the next week or so, so that all the scared little investors can regain some confidence :

Would this be enough of a correction for another large upswing? or do we need to consolidate at the 620 mark for a nicer long term trend?

 

[Sean K]

Re: GOLD Where is it heading?

It's only going to take more news like this for gold to reverse it's downward slide:

0015 GMT [Dow Jones] Japan public broadcaster NHK report North Korea may be preparing to launch what seems to be Taepodong-2 long-range missile could bring end to gold slide as metal viewed as safe haven in times of uncertainty; Japan investors in particular may be jittery, remembering how in 1998 North Korea lobbed Taepodong-1 missile over its territory and into Pacific. Report says satellite photos show increased activity at missile base in northeast, though adds missile doesn't seem ready for firing yet; may be more a bid to force U.S. hand on negotiations over Pyongyang's nuke ambitions. Taepodong-2 missile has range of around 6,700 kilometers, some predict it may be able to reach continental U.S. Gold last at $679.40, little changed from NY.(JSH)

We live in an unstable world.

 

[LPA]

Re: GOLD Where is it heading?

I've been looking at it this way....if gold and precious metal goes up with instability then we are set to see them all stay high for the rest of our lives

And if it gets so bad that the markets crash completely (nuclear war) then we really won't be that concerned with how much money we have now will we

 

[nizar]

Re: GOLD Where is it heading?

Would this be enough of a correction for another large upswing? or do we need to consolidate at the 620 mark for a nicer long term trend?

On the ball there LPA

Consolidation at 600-620 over the next few weeks would be nice. Jim Rogers has even called 550-600

Then i expect to see 800-850 very quickly by end of august

IMO....

 

[RichKid]

Re: GOLD Where is it heading?

An article from Kitco on trading tactics and the correction in gold: http://www.kitco.com/ind/Wiegand/may182006.html

 

[wavepicker]

Re: GOLD Where is it heading?

I have provided a 5 year log chart of gold(just for refernce) based on my interpretation of the Elliott Wave Principle. I have been wrong on many occasions before, and this chart should not be assumed to be 100% correct. This same chart was sent to tech/a some weeks ago when I said to him I beleive we were close to a top ( $660 level) where I liquidated my position.

The market ran up higher than that of course!!( Damn I always seem to miss out on that last leg of a wave count- so very difficult to get spot on) But who cares, as far as I am concerned our job is not to pick exact tops and bottoms but to identify when a trend is at risk of ending and then exiting safely. Gold has now fallen back very quickly to that level and that stance can be justified.

Now how far will it fall back? Throughout my own experience in Elliott waves, I have noticed that wave 2 corrections have a 65% statistical tendancy to find support between the 0.382 to 0.500 levels of the whole 5 wave impulse advance.That would mean a pullback to bewteen the 490-545 level.

Having said that, if you follow "Elliott Wave Principle" by Frost and Prechter, they make quite a strong case for the level of the previous 4th wave of one less degree( in this case 425-452 level) which just so happens to coincide with 0.618 fibonacci level of this whole impulse. Although they say this is not a rule but a guideline. Given we have had such a powerfull move from the low of $250, I don't think this will be the case, but anything is possible in the market and nothing can be taken for granted. If it's one thing that I have learnt in the market, what seems logical- usually will not happen. That is why I try and stay clear of fundementals.

Then there is a question of time. If the whole bullmarket advance(an impulse) took more than 6 years to complete, would you expect a shallow correction in terms of time? I don't think so. Throughout my studies I have noticed that a second wave can take anything between 23-50% of the time it took to complete the advance. In most cases 38.2%.

That is why I have been saying more like 2-3 years.

Once again, all the above is just my opinion- based on the way I see it to date. I could be very wrong

Cheers