Gold Price - Where is it heading?

[chops_a_must]

http://www.theaustralian.news.com.au/business/story/0,28124,24542950-36418,00.html


Actually the current rumours running through WA are really nasty.........
.

Yup.

And there is a strong basis for it. I can vouch for it.

Big contracts are being torn up left, right and centre.

And then you have that meataxe Gryllths stopping anything being done in Perth for the next 20 years...

 

[amory]

I agree, so does Jim Sinclair:-

D

Explod: your opinion I respect, but Jim Sinclair's is worthless. that self-proclaimed guru has cost his subscribers untold millions in bad advice. as you may know, he has recently changed his stance from THIS IS IT ... 1650 just around the corner, to a more realistic timespan ... jan 2011.

but now, he is once again rubbing his hands in glee, as follows:

Posted On: Friday, October 24, 2008, 9:32:00 AM EST

Much Faster Than Anticipated
Author: Jim Sinclair

Dear CIGAs,

Gold is a currency.

Paper currency insures nothing.

Gold is insurance.

Gold is not a commodity.

Gold will trade at a minimum of $1650 MUCH SOONER THAN I HAVE ANTICIPATED.

The shorts in gold shares will get what they deserve - financial decimation.

Your friend,
Jim
..............................................

going by his record to date, would you still agree with him, or is he as full of it as ever? Gold at USDollar 1650 an oz ..... dream on, Jimbo!

 

[ducati916]

amory,

Simply take the following figures;

1971...........price of gold = $35oz
Nixon ends exchangability.

1971-2008 compounded inflation rate = 4.68%
Current inflation adjusted value of gold = $190oz

jog on
duc

 

[solomon]

To some degree I think you should reflect gold's growing scarcity and increasing cost of production in those figures Ducati.

 

[ducati916]

solomon,

In the past [on this thread] I have already done so. The price is higher. However when people claim values for gold based on an inflation basis, then you see just how low the value from the current market price it falls.

However, with regards to "scarcity" all the gold ever mined is still with us. Even the stuff at the bottom of some ocean.

jog on
duc

 

[chops_a_must]

In the past [on this thread] I have already done so. The price is higher. However when people claim values for gold based on an inflation basis, then you see just how low the value from the current market price it falls.

Or perhaps the inflation figures are just all BS.

 

[ducati916]

chops,

That may well be the case, certainly the CPI calculation was altered, ostensibly to "reduce" inflationary readings.

Therefore if we take the $1000oz price as "rational" we would have had a 9.48% compounded inflation rate.

If we take some of the more "out there" valuations of $3000oz then we have a 12.78% compounded rate.

Which inflation rate would seem to be "most" realistic?

jog on
duc

 

[ducati916]

chops,

Here are some "alternative" methods.

In 2007, $100.00 from 1971 is worth:

$511.83 using the Consumer Price Index
$414.37 using the GDP deflator
$563.82 using the value of consumer bundle *
$500.77 using the unskilled wage *
$842.21 using the nominal GDP per capita
$1,225.05 using the relative share of GDP

jog on
duc

 

[solomon]

solomon,

In the past [on this thread] I have already done so. The price is higher. However when people claim values for gold based on an inflation basis, then you see just how low the value from the current market price it falls.

However, with regards to "scarcity" all the gold ever mined is still with us. Even the stuff at the bottom of some ocean.

jog on
duc

okay, thanks.

By scarcity I had in mind that scarcity adds to production costs as well as inflation.

Exponential population growth since gold was $35 = more (on average) who believe gold is a currency and if gold production hasn't kept pace with population growth then there is something bigger at work than suggesting higher prices than a simple inflation adjusted price. (though I realise this is beyond the scope of your original post which was just pointing out a fact )

 

[chops_a_must]

chops,

That may well be the case, certainly the CPI calculation was altered, ostensibly to "reduce" inflationary readings.

Therefore if we take the $1000oz price as "rational" we would have had a 9.48% compounded inflation rate.

If we take some of the more "out there" valuations of $3000oz then we have a 12.78% compounded rate.

Which inflation rate would seem to be "most" realistic?

jog on
duc

Probably somewhere between the two.

But inflation over the last few years probably has been well over 10% whilst the readings were ludicrously low.

But I think the great man said it best:

 

[ducati916]

okay, thanks.

By scarcity I had in mind that scarcity adds to production costs as well as inflation.

Exponential population growth since gold was $35 = more (on average) who believe gold is a currency and if gold production hasn't kept pace with population growth then there is something bigger at work than suggesting higher prices than a simple inflation adjusted price. (though I realise this is beyond the scope of your original post which was just pointing out a fact )

That of course is the problem, there's not enough physical gold to make a viable currency, which is why it morphed to a "Gold Standard" and later a watered down "Gold Exchange"

Rightly, or wrongly, the Gold Standard was credited with exacerbating problems in the 1930's and contributed to the policy of "inflation" that is now "de rigeur" government policy response.

jog on
duc

 

[barrett]

amory,

Simply take the following figures;

1971...........price of gold = $35oz
Nixon ends exchangability.

1971-2008 compounded inflation rate = 4.68%
Current inflation adjusted value of gold = $190oz

jog on
duc

No the problem is that you're making the assumption that no consumer price inflation took place between 1934 - when the gold price was fixed at $35 by government decree - and 1971 - when it was let loose. Better re-do the numbers.

Incidentally, who's to say that the $35 price was even accurate in 1934 - since it was decided by a gnome and not by a properly functioning marketplace.

We know that the past 25 years or so, governments have heavily toyed with the way inflation figures are calculated to benefit their own balance sheets but mainly to keep the public's confidence that inflation is low, since during the 70s they learnt the importance of public perception in either fuelling or preventing runaway inflation. The 'real' numbers are a matter of dispute. This chart was produced using the same method that was used in 1980 http://www.shadowstats.com/alternate_data, also below.
A brief justification for doing that and discussion of some CPI-related issues is here:
http://www.shadowstats.com/article/350

 

[Uncle Festivus]

http://www.theaustralian.news.com.au/business/story/0,28124,24542950-36418,00.html


Actually the current rumours running through WA are really nasty.........
.

Unless they sell their gold for US dollars - the Aussie gold price is going up.

Perhaps not due to falling prices but cost containment then.

High costs at Telfer were a blip on an otherwise solid production report that included record quarterly gold production of 485,978 ounces, up 12 per cent from the previous quarter.

Aussie golds will show good profits out of this quarter.

Why do people focus on the US price when it's the Aussie price that matters?

 

[ducati916]

No the problem is that you're making the assumption that no consumer price inflation took place between 1934 - when the gold price was fixed at $35 by government decree - and 1971 - when it was let loose. Better re-do the numbers.

Incidentally, who's to say that the $35 price was even accurate in 1934 - since it was decided by a gnome and not by a properly functioning marketplace.

We know that the past 25 years or so, governments have heavily toyed with the way inflation figures are calculated to benefit their own balance sheets but mainly to keep the public's confidence that inflation is low, since during the 70s they learnt the importance of public perception in either fuelling or preventing runaway inflation. The 'real' numbers are a matter of dispute. This chart was produced using the same method that was used in 1980 http://www.shadowstats.com/alternate_data, also below.
A brief justification for doing that and discussion of some CPI-related issues is here:
http://www.shadowstats.com/article/350

barret

Actually I have already done that earlier in the thread, around page 17 from memory.

From 1932 @ 3.82% = $560oz
From 1921 @ 2.84% = $240oz

The problem is that various countries went off gold, then came back on, at some arbitrary figure, so while I don't disagree that the starting point changes the final value, the final value is still well below the current market price.

The Traditional CPI Concept Has Been Politically Mauled. At the heart of the differences over CPI reporting is the way CPI is viewed or defined. My basic approach to looking at CPI inflation is from the standpoint of common experience and traditional expectations that the CPI measures the cost of maintaining a constant standard of living, that reflects costs out of pocket to get a products or services in hand, not some nebulous benefits estimated by the BLS of having to pay for an expensive new gasoline additive when filling a gas tank.

Which is why I included in the previous post, some alternative methodologies in calculating the inflation rate.

1934
to
2007
Consumer Price Index 3.82%
Unskilled Wage *
Nominal GDP 7.59%
Real GDP 3.90%
GDP Deflator 3.55%
Nominal GDP per capita 6.32%
Real GDP per capita 2.67%
Population (millions) 1.20%
Dow Jones Average 6.94%


1900
to
2007
Consumer Price Index 3.07%
Unskilled Wage *
Nominal GDP 6.27%
Real GDP 3.25%
GDP Deflator 2.92%
Nominal GDP per capita 4.91%
Real GDP per capita 1.93%
Population (millions) 1.30%
Dow Jones Average 5.46%


Obviously what can be seen is that the further back that you go, the lower the compounded rate of inflation due to the longer period of stability provided by the gold standard.

Thus by coming into 1971, you actually get a much higher inflation rate, that includes the "Great Inflation" of the 1970-1980 period.

The key takeaway is "purchasing power" You see the CPI is also a function of "Wage growth" or lack thereof.

The chart you display, may well be accurate in displaying an inflation spike @ 12%, but an inflation spike is not COMPOUNDED GROWTH.

Thus, the price of Gold, may be displaying a price spike that correlates to an inflation spike, but will it continue indefinitely?

No.

It will I agree trend upwards for some indeterminate time period. Interest rates are highly inflationary, thus inflation will tend to trend upwards, until rates again rise to curb inflation.

Is Gold the best hedge against inflation currently?
No, I don't think so.

jog on
duc

 

[cuttlefish]

Is Gold the best hedge against inflation currently?
No, I don't think so.

ducati - what do you see as good inflation hedges at this point in time?

Also do you have any views on gold as a hedge against USD collapse?

 

[ducati916]

ducati - what do you see as good inflation hedges at this point in time?

Also do you have any views on gold as a hedge against USD collapse?

cuttle,

With the stunning contraction through commodities generally, and oil particularly, a longer term opportunity might be presenting itself.

Certainly from the chart we can see that oil the commodity, fell to $20/barrel during the 2001-2002 recession. As this recession is likely to be both deeper and longer, holding off for the time being would be prudent. At some point however, a longer term investment within this sector is likely to pay off.

Year……………….%Capitalization…………S&P500……Compounded gain
1929…………………..8.48%………………..30.10
1932………………….10.86%………………..7.12
1949………………….16.0%………………..15.29
1982………………….12.6%……………….109.70
2008………………….8.53%……………….876.77
……………………………………………………………………4.36% [not including dividends]

The oil majors were always within the first three sectors and very often the largest sector within the S&P500; thus their growth has been consistent with both the market and the economy.

While by comparison other “major sectors” have faded through the years, automobile, aircraft, rails and a host of other sectors that have simply disappeared. While it is true that alternative energy must become a focal point, oil is critical to so many products that it’s ultimate demise will take time.

Inflation.
With the incredible monetary stimulus that is now worldwide, there will be inflation, and possibly a very serious out of control inflation. China, who has amassed some $2 Trillion in foreign reserves, predominantly denominated in USD, with a rapidly slowing economy, due to contraction in demand from both the US & Europe, will do what with them?

Looked at another way, China will not be amassing further reserves at the rate that they had been. Thus an immediate consequence will be a rise in interest rates across the part of the curve where China was accumulating US Treasury paper. Should they also start to sell reserves, to fund their economy in a Keyenesian manner, again, interest rates will rise across that part of the curve.

In an inflationary environment, the purchase a real assets and commodities can hedge the inflationary pressures providing real returns. Oil, although subject to any number of risks, political, war, terrorist, environmental and supply/demand shocks, still provides an attractive commodity to invest in.

Should the bear market deepen, where would the likely purchasers come from? For the actual commodity, oil itself, the buyers would have to be the economies themselves, in the form of products, be that energy generation or as a component in product manufacture. With a recession of potential depth forming, economies could well cut back for the indeterminate future.

With equity, the buyers might likely be corporations themselves. In an inflationary environment, rising prices of land, plant, reserves, and other input costs, rise with inflation. The price of equity however tends to fall, thus making it cheaper to consolidate, rather than expand.

Therefore, in an inflationary environment, it would be more rational to look to purchase equity that will appreciate in real terms in either scenario.

We would want in trying economic conditions one of the majors, who has the ability to withstand the economic downturn and capability to expand through consolidation, acquiring competitors at advantageous prices.

1 BP
2 COP ConocoPhillips
3 CVX Chevron Corp.
4 E Eni SpA
5 PTR PetroChina Co. Ltd.
6 PZE Petrobras Energía Participaciones S.A.
7 RDS-B Royal Dutch Shell
8 REP Repsol YPF SA
9 TOT Total SA
10 XOM Exxon Mobil Corp.

jog on
duc

 

[ducati916]

cuttle,

Paradoxically, I see the USD entering a bull market, based on "relative" interest rates.

In a recession, interest rates will fall, to promote growth. Both Japan & the US have the lowest rates, thus they have the least farthest to fall.

If inflation again predominates, which I am expecting, then both Japan & US have the most to gain from rising rates [relatively speaking]

The difference, is that it is a "global" recession, rather than a more isolated recession.

jog on
duc

 

[explod]

cuttle,

Paradoxically, I see the USD entering a bull market, based on "relative" interest rates.

In a recession, interest rates will fall, to promote growth. Both Japan & the US have the lowest rates, thus they have the least farthest to fall.

If inflation again predominates, which I am expecting, then both Japan & US have the most to gain from rising rates [relatively speaking]

The difference, is that it is a "global" recession, rather than a more isolated recession.

jog on
duc

You obviously only note what you want to. If you had read over the posts on this thread over the weekend and the stories behind the links provided you would know that most of what you are saying here is rubbish.

On the other hand you make statements without backing them up with reasons. When we attempt that we get into less trouble because it makes one realise sometimes that what we are trying to put forward lacks substance.

 

[sinner]

ducat, are these numbers you quote in USD?

How do you feel about the rate of ASX GOLD vs the COMEX rate? I noticed immediately after Lehman Bros (before AUD dropped against USD) that ASX GOLD diverged massively from the COMEX rate. ASX GOLD is still sitting (technically) at all time highs, but slowly converging back with COMEX gold if you factor in exchange rates.

You can see things beginning to diverge in July with full trend breaking at Lehman collapse.

Nonetheless, Aussies have proven they can, do and will play a different game when it comes to gold. Not sure what this means exactly.

First one is ASX GOLD second is NYSE SPDR Gold Trust (ETF).

 

[barrett]

WRT interpreting the $A gold price - it's just a passive product of two other numbers that are determined on things far removed from (and far more important than) Australians' appetite for gold.. they are: 1) USD gold price, and 2)AUDUSD exchange rate.