Gold Price - Where is it heading?

[awg]

a few questions from a bit of a gold novice.

have owned gold stocks, but recently cashed out.

now looking to time a re-entry, and have been doing some reading.

especially on the possible disconnect between physical and paper price.

what i am looking at as alternatives are purchasing some physical gold or shares in miners Newcrest and LGL.

my question would relate to what extent these miners would be classified as "paper" and therefore suffer a disconnect.

my reading suggests the disconnect would not be as bad as other forms of paper gold.

I am waiting for the US $ to show some form of retreat.

the big advantage in miners shares is I can liquidate easily if I get the timing wrong.

I may well do both.

I do not wish to solicit advice, as this would be innapropriate, but opinions from more experienced gold followers would be timely..i think there would be many posters looking at these considerations at the moment

 

[cuttlefish]

<on inflation>

<on the USD>

Ducati - cheers for the comments and justifications on both questions. The USD strength threw me initially - though I think I've started to get my head around some of the reasons for it in the short term. Longer term is another story - and depends a lot on continuing support for its reserve currency status by the stronger economies imo. That probably depends on how worthwhile a trading partner the US is perceived to be in its current state and into the future (as well as a host of other political factors).

 

[refined silver]

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.

Amory if you are going to post, at least try to get some of the facts right.

1. $1650 has been Sinclair's target since 2001.
2. His date for $1650 has always been January 2011 ever since he named a date.
3. He has no subscribers. He has never published a newsletter, and never charged a cent for anything.
4. The "THIS IS IT" quote refers to the derivative meltdown which he stated would happen years ago, and he has consistently predicted many of the things which have come to pass and some that haven't yet.

 

[barrett]

Ducati, I liked your reasoning on oil companies, I also think they are likely to be a great hedge against inflation. I don't think gold is about to stop being a hedge against inflation though.

I don't follow your reasoning that the USD and JPY will enter an extended bull market because they have the lowest interest rates - if anything it seems the Fed will need to cut rates further and probably to zero, if they are to avert a depression scenario. I don't think I'm being hyperbolic there am I - I think a US depression is the situation that would naturally occur when this amount of leverage is unwound, were it not for the expected Keynesian response. Maybe in spite of the response - if you believe Prechter.

On the 'gold in today's dollars' calculation, it looks to me like you've used the official CPI figures rather than for instance, the shadowstats estimates. That's OK, but you then need to keep in mind your 'fair' gold price estimate is likely to be well on the low side.

I appreciate your work in calculating it but I'm far from convinced that this 'fair value' calculation should be used as a guide for investing and trading. The reason is that economies tend to go through long periods of monetary expansion that finds its way into financial assets (eg 1981-2000), immediately followed by long periods of monetary expansion that increasingly finds its way into hard assets like commodities and gold (eg 2000 onwards). The price of gold is more determined by whether you happen to be in the first or second stage of a monetary inflation cycle (see attached chart) than what the theoretical 'fair value' of gold is at the time.

 

[ducati916]

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.

explod,

Possibly it hasn't occurred to you but every "story" behind a link comes with it's own assumptions and biases.

What evidence is there to support their "rubbish" over my "rubbish?"

I am assuming you are referring to my comments on "Interest rates?"

The interest rates are a fact.

I provide my "reasons." That you do not agree with my reasons is acceptable, but that you cannot discern a "fact" and a "reason" rather makes me consider your criticisms immaterial.

jog on
duc

 

[ducati916]

Ducati - cheers for the comments and justifications on both questions. The USD strength threw me initially - though I think I've started to get my head around some of the reasons for it in the short term. Longer term is another story - and depends a lot on continuing support for its reserve currency status by the stronger economies imo. That probably depends on how worthwhile a trading partner the US is perceived to be in its current state and into the future (as well as a host of other political factors).

cuttle,

Longer-term is always a bit of a conundrum. Trends, tend to persist, long after they [possibly] should. Currency trends are some of the strongest trends.

The US I posit is one of the "stronger" economies, thus, will pull through. Depression/Recession is a normal part of the business cycle. Unfortunately, some [excessive] support was required due to the delaying of the recession, certainly from 2000, thus, it [recession] is likely to be deeper.

However, recessions are normal, and restore the growth to economies. Thus, once the excesses are squeezed out, the US will again expand.

Economies, currencies, stockmarkets, however do not correlate tightly over all timeframes, so there will be the usual shocks and surprises along the way.

jog on
duc

 

[ducati916]

Ducati, I liked your reasoning on oil companies, I also think they are likely to be a great hedge against inflation. I don't think gold is about to stop being a hedge against inflation though.

I don't follow your reasoning that the USD and JPY will enter an extended bull market because they have the lowest interest rates - if anything it seems the Fed will need to cut rates further and probably to zero, if they are to avert a depression scenario. I don't think I'm being hyperbolic there am I - I think a US depression is the situation that would naturally occur when this amount of leverage is unwound, were it not for the expected Keynesian response. Maybe in spite of the response - if you believe Prechter.

On the 'gold in today's dollars' calculation, it looks to me like you've used the official CPI figures rather than for instance, the shadowstats estimates. That's OK, but you then need to keep in mind your 'fair' gold price estimate is likely to be well on the low side.

I appreciate your work in calculating it but I'm far from convinced that this 'fair value' calculation should be used as a guide for investing and trading. The reason is that economies tend to go through long periods of monetary expansion that finds its way into financial assets (eg 1981-2000), immediately followed by long periods of monetary expansion that increasingly finds its way into hard assets like commodities and gold (eg 2000 onwards). The price of gold is more determined by whether you happen to be in the first or second stage of a monetary inflation cycle (see attached chart) than what the theoretical 'fair value' of gold is at the time.

barrett,

With regards to Gold remaining an inflation hedge. That is most likely true. The point I'm making however is that gold, due to its price run-up is less effective as an inflation hedge as it now reflects a speculative component.

That speculative component far exceeded the purely "inflationary" element and I would have sold out circa $700 on the first run-up

Inflation hedges are best implemented when the hedge is "undervalued" thus oil companies who hold oil as "equity" represent "probably" the best values. I haven't crunched the numbers yet, so I have nothing save opinion atm.

The Fed may well cut to 1% but they can not go any lower than 0% Most other countries [excluding Japan] are higher currently, so they have further to fall.

Interest rates are "supposed" to compensate for risk. Who would you trust more, Bulgaria, or the US?

Well whatever your answer, that's where you run to cash. The RETURN OF principal becomes more important than the RETURN ON principal.

That in effect is partially what we are seeing. Risk averseness, and a flight to safety + carry trade unwinding.

With regard to my "Fair Value" being low. That's fine. I would rather it be low. Then should it fall to my price, I would have greater comfort in buying it. High valuations tend to disappoint.

As to not using figures for investing and trading. Ok, so what would you suggest?

jog on
duc

 

[explod]

explod,

Possibly it hasn't occurred to you but every "story" behind a link comes with it's own assumptions and biases.

What evidence is there to support their "rubbish" over my "rubbish?"

I am assuming you are referring to my comments on "Interest rates?"

The interest rates are a fact.

I provide my "reasons." That you do not agree with my reasons is acceptable, but that you cannot discern a "fact" and a "reason" rather makes me consider your criticisms immaterial.

jog on
duc

You are probably correct and the rubbish componenet is everywhere.

Interest rates have become meaningless. They are being dropped to restimulate what cannot be restimulated. Cash is getting (or loans) hard to obtain. Even good businesses are finding it difficult to borrow for proper enterprise. Read to day that China has lost its way, the US certainly has with most of the rest. What we are suddenly finding is that none of them actually know what to do.

To cut a long story short the penny will soon drop that money is going to become scarce and expensive which will drive interest rates up to levels not seen since the Whitlam years. The speed at which we have recently arrived at this spot in time would suggest that the next spots will not be too far away either.

It is a simple matter of supply.

 

[amory]

Amory if you are going to post, at least try to get some of the facts right.

1. $1650 has been Sinclair's target since 2001.
2. His date for $1650 has always been January 2011 ever since he named a date.
3. He has no subscribers. He has never published a newsletter, and never charged a cent for anything.
4. The "THIS IS IT" quote refers to the derivative meltdown which he stated would happen years ago, and he has consistently predicted many of the things which have come to pass and some that haven't yet.

thank you for your comments Ref-Silver.
points 1. & 2. I am afraid I must disagree with. he has been shouting 1650 & more ... and sooner than you expect ... from the rooftops since time began, hence his army of willing devotees being led to slaughter over the past few years.
but all this is now irrelevant, ancient history if you like. the main question is: have we been under a cloud of misapprehension re Gold as an alternate currency when all else fails, for all these years?
or is it just barely conceivable that when the next Bretton-woods comes around, gold will be overlooked entirely & some other solution will be found, to the currency mess the world will undoubtedly find itself in? it is beginning to look that way.
even if the prediction of 1650 by early 2011 should come true (and I still maintain that he has moved the goalposts quite substantially since the time when an ounce of gold was over $1000) ... by 2011 the whole landscape may have changed. commodities may be well on their way to healthy recovery - Gold just one among others. that's if one chooses the optimistic view.

 

[Uncle Festivus]

I think the inflation aspects for gold are largely irrelevant for determining the gold price these days. You could get 10 people who can actually bother to work a (inflation) value out for it and still get 10 different answers - waste of time as it only matters to those who think it does?

It's a $USD play that's setting the trend, and that trend may be about to change with a spinning top at resistance 87 on the weekly DX forming. Just need to see how this week finishes up.

The extra bonus from the Aussie dollar bleed might also become at least muted due to the signalling from the Reserve Bank to finally step in to support it.

The gain/time ratio for the DX looks like it's going to revert to more historical norms after the historically abnormal gains?

DX overbought, HUI oversold, time for a re balance?

 

[brty]

Hi,

explod...

money is going to become scarce and expensive which will drive interest rates up to levels not seen since the Whitlam years.

Ahh yes............ the high interest rate years of the Whitlam govt, where interest rates went up from 7.00% in late '72 to 10.38% by the time he was kicked out.

They don't actually seem that high to me.

brty

 

[cuttlefish]

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

Ducati I'm going to have a go at tackling this.

By reference I'll link this wikipedia article as I am trusting the info on there to be reasonably accurate: http://en.wikipedia.org/wiki/Gold_standard#Gold_standard_from_peak_to_crisis_.281901.E2.80.931932.29

My take on this is that the USD price of gold in 1971 of $35 was not real - this is why Bretton Woods was abandoned. Since the great depression, when the US govt had to lift the gold price from $20 to $35 to stop arb traders buying gold at the US official rate and selling on the "black market" (free market) the US was constantly trying to hold down the price of gold, including the establishment of the gold pool to try to dampen spikes in the london market prices.

So a better time to start the $35 exchange rate is probably 1933 when it first came about. If we use the same inflation rate (very conservative given it spans two world wars) of 4.68% then $35 compounded from 1933 gives us a 2008 gold price of USD $1080.

As we know - asset prices fluctuate around means - so a conservative inflation based estimate for gold at $1080 could easily translate to a hyped up value of $2000+.
But the other more important thing we know is that for the 40+ years the US struggled to maintain the gold standard after the depression and through the wars, they were pretty shackled in terms of the amount of deficit they could run and debt they could issue. So really the US was very restrained for 40 years due to the restrictions of the gold standard. Now - for nearly 40 years from the abolition of the standard in 1971 they have been very unrestricted. That has to translate into the price equation somewhere surely.

This comes back to the willingness of economically healthy sovereign nations to respect the USD as a reserve currency. In the same way the US, as a healthy and productive economy that other economies relied upon, was able to abandon the gold standard with no ill consequences, there are nations that are probably economically able to abandon the USD standard if they so decide - the oil producing nations? - the Japanese? - and continue to trade with the partners that they need to trade with under different terms - a new free market.

The more the US govt intervenes to regulate free markets the less their currency is a free currency and the more likely that its reserve status is tarnished and fades - leaving the US in a less than enviable position.

Does that mean gold prices will rise - no - but as a safe store of value it is still up there - almost universally accepted culturally and consistently accepted historically as a thing of value - and will almost certainly endure over the USD in the long run and possibly the short run.

 

[gav]

This comes back to the willingness of economically healthy sovereign nations to respect the USD as a reserve currency. In the same way the US, as a healthy and productive economy that other economies relied upon, was able to abandon the gold standard with no ill consequences, there are nations that are probably economically able to abandon the USD standard if they so decide - the oil producing nations? - the Japanese? - and continue to trade with the partners that they need to trade with under different terms - a new free market.

Except MASSIVE debt! Have a look at US debt over the past 60 years, specifically from when Nixon abandon the gold standard

 

[cuttlefish]

Except MASSIVE debt! Have a look at US debt over the past 60 years, specifically from when Nixon abandon the gold standard

Sorry if you misconstrued what I was saying gav, but what you are highlighting is exactly the point I was trying to make. For 40 years the US had to restrain themselves due to the gold standard, so when the shackles were lifted in 1971 they made up for lost time. The point is in 1971 they were economically and politically in a strong enough position to be able to do this and have the world accept it. Were they to try to repeat the exercise today I doubt it would receive the same reception. So a question in my mind is - are there are possibly other candidate sovereign economies around today questioning whether the USD is essential to their relationships with key trading partners, and is it time to look at alternatives.

 

[ducati916]

cuttle,

So a better time to start the $35 exchange rate is probably 1933 when it first came about. If we use the same inflation rate (very conservative given it spans two world wars) of 4.68% then $35 compounded from 1933 gives us a 2008 gold price of USD $1080.

This is the problem, the "official" inflation rate from 1933 [75yrs] is 3.82% which gives a value of $582oz

If I go back to 1775, the oldest data I have, the inflation rate is 1.45%. This makes intuitive sense, as gold really was money. Inflation grows from about 1942 as monetary policy became increasingly inflationary.

Thus we have the problem that you highlighted. The inflation rate can be argued about to its accuracy, but I tend to agree that the fixed price of Gold in 1971 at $35 was artificial and thus too low.

So, if we take $20oz from say, 1880, use the inflation rate from 1880 to 1971 to establish a "market inflation" based price, and move forward from there.

Gold in 1880 = $20.67
Inflation rate = 1.56%

Value of Gold in 1971 = $84.50oz
Current value = $459oz

How does that sit with you?

jog on
duc

 

[gav]

Sorry if you misconstrued what I was saying gav, but what you are highlighting is exactly the point I was trying to make. For 40 years the US had to restrain themselves due to the gold standard, so when the shackles were lifted in 1971 they made up for lost time. The point is in 1971 they were economically and politically in a strong enough position to be able to do this and have the world accept it. Were they to try to repeat the exercise today I doubt it would receive the same reception. So a question in my mind is - are there are possibly other candidate sovereign economies around today questioning whether the USD is essential to their relationships with key trading partners, and is it time to look at alternatives.

Sorry Cuttlefish! Thanks for clearing that up, makes much more sense now. And I think your point is very valid.

 

[cuttlefish]

cuttle,

This is the problem, the "official" inflation rate from 1933 [75yrs] is 3.82% which gives a value of $582oz

... (edit) ...

How does that sit with you?

jog on
duc

Ok duc - I'm willing to start working with the $582 figure as being a very conservative inflation adjusted figure for the price of gold.

I'd still see this as a price floor - because I still believe the massive expansion of US debt/money subsequent to the breaking of the standard needs to be taken into consideration - but lets put that aside for now.

I'd like to tackle the inflation rates. On the basis of a 1933 $US $35 price we arrive at the true gold price in 1971 being more like $145/oz.

Now some history from my own perspective.

When I was a child, houses in the area I grew up in sold for $30 - $50k in around 1978. The exact same houses (i.e. original homes that existed during that time and on the same blocks of land) now sell for $400 - $600k (unrenovated at the lower end). The gentrification levels for the suburb are not significantly different between then and now and not the primary driver for the price increases.

I could buy an icecream (same brand as sold today) for 10c retail in 1976 and its now about $1.80 - thats about 9.5% inflation.

I could get a can of coke for .20c retail, now about $3 retail.

So an inflation rate from 1976 of 8% seems conservative.

So if I extrapolate $145 from 1971 (gold from 1933 to 1971 at 3.8%) - then continue it to 1976 at 3.8% I get $174 for gold in 1976. Then if I accelarate inflation to 8% from 1976 till 2008 I get $2050 for gold in 2008.

Thus based on my own personal experience I still suspect that the 3.8% inflation is very conservative and thus would consider $580 as at the lower end of reasonable guesses as to an inflation adjusted gold price.

 

[ducati916]

cuttle,

I see where you are coming from. Taking your "Can of Coke" example, we see a 9.44% inflation rate.

This is why a "basket of goods" is utilised.

"Price stickyness" is an economic concept [theory] that tries to address this problem via the basket of goods construct. Some prices, for a variety of reasons [Brand power, monopoly position, etc] demonstrate pricing power. Their prices do not adjust as easily, or as quickly, to market forces.

On the other hand, you have "commodity goods" that prices adjust very quickly, are non-sticky, and have deflated over time, small electrical goods come to mind, toasters etc.

When taken as a basket, they should give you the geometric inflation rate of the longer term series.

Financial assets that are lacking "LIQUIDITY & MARKETABILITY" provide the same stickyness observed in consumer products.

Housing is the classic example in this class. Due to high transaction costs, low liquidity & marketability, no "mark-to-market" pricing and the unwillingness or inability of holders to take a loss, housing demonstrates high stickyness.

Gold, is an interesting asset class in that it crosses a number of classes. Financial asset, industrial input commodity, consumer good, and psychological component, thus the supply/demand curves can become very confused.

Any pricing, as this thread aptly demonstrates, can become quite intricate once you try and price the different components.

jog on
duc

 

[bribieman]

Well the drop IMHO OVER THE LAST 3 WEEKS is the Hedge Funds trying to get Liquid. They are selling what ever is not nailed down getting ready for their 15th of NOVEMBER redemtion slips for Joe the Plumber in the US.

Maybe signs of an increase once the sale has finished might show up soon.

 

[explod]

Well the drop IMHO OVER THE LAST 3 WEEKS is the Hedge Funds trying to get Liquid. They are selling what ever is not nailed down getting ready for their 15th of NOVEMBER redemtion slips for Joe the Plumber in the US.

Maybe signs of an increase once the sale has finished might show up soon.

Absolutely, and to that is a falling off in the last day or two of the $US index. It is all about currency and sentiment. The drop in the fed rate will reduce the dollar value as it always does and up goes gold at the other end of the see saw.

The funds and most other trading has to pass back and forth through the US dollar. This volume (which is unprecedented, this is a global unwinding) has sentiment concluding the US dollar is a safe haven. Its fall now may be profound.

We live in most interesting times and we will may see results soon. IMVHO as always