Gold Price - Where is it heading?

[Mr Z]

What are the fundamental drivers?

Are there speculative drivers?

If my memory serves me correctly Wayne you lean toward the Austrian School of Economics. That being so you should be well placed to describe what is fundamentally driving this market. If my memory is faulty then I can't really help you, I have found over the years that the basic explanations that one offers on a forum are simply not believed. You really need to do the work yourself if you want to understand this, no amount of spoon feeding it will work.

You could start with this sentiment...

Government is like a baby. An alimentary canal with a big appetite at one end and no sense of responsibility at the other.

Ronald Reagan

Speculative drivers are based in greed, the belief that the fundamentals are misinterpreted by most of the market or are about to change and the willingness to bet on that before the evidence is really there. The bears are the speculative ones at this point in a bull market, often they are simply speculating on the financial state of the long side of the contract. Price has run, there must be weak hands in over reach, there is opportunity to shake them free --> classic futures action amplified by a smaller, less liquid market.

 

[explod]

What are the fundamental drivers?

Are there speculative drivers?

I'd have thought that an examination of joea's chart a few posts back would have, in the broader sense, answered the first question.

Speculation becomes part of any up (or down trend) and is quite seperate to fundamental issues. In gold's case it is fear of losing ones overall equity base and therefore an insurance. Sentiment has a rold to play in the volatility and that is driven by media and overall feelings of the market place.

With the first point in place we should see the buying of the dip come into play here. However in the medium term it will be the US$ playing the tunes. Ofg course this is making aussie firm.

 

[wayneL]

If my memory serves me correctly Wayne you lean toward the Austrian School of Economics. That being so you should be well placed to describe what is fundamentally driving this market. If my memory is faulty then I can't really help you, I have found over the years that the basic explanations that one offers on a forum are simply not believed. You really need to do the work yourself if you want to understand this, no amount of spoon feeding it will work.

Yes I understand that, if money is gold backed. But at present money is fiat.

I guess my question is how to find the intrinsic value of gold, in fiat.

What are some valuations on this basis?

 

[Mr Z]

Just to further complicate the fundamental side of the equation one, normally shorter term, fundamental driver of any market is the financial condition of the participants and their ability maintain the current trend. Often on short term price extensions we get the price overreaching the market participants capacity to support it. You get weaker hands chasing price while the more sober longer term participants simply await the enviable pull back, waiting to buy at whatever price floor becomes apparent. I beleive this is all that has happened here, what is more it will happen many more times before we are done. In fact it will happen so often that toward the end of the market the ubiquitous mantra will be buy the dips.

The evidence I have so far, from a number of physical metal dealers in the US, is that this dip has been met with massive buying, especially in silver. The first guy I spoke to on Saturday had sold out. If this response has been similar across the nation, and I believe it is, there will be a big follow through into the Comex and OTC markets as these dealers re-stock. This is a big signal from the market that the PM's are good buying at these levels.

If you want to check some of the public sources for yourself Tulving publishes inventory numbers and King World News talks to Bill Haynes of CMI Gold & Silver Inc. Before claims of self interest are made here, I can tell you that I have checked Bills reports against private sources often and by and large they are saying the same thing... Fridays physical buying in the US was massive, these people are scared and want financial protection from their governments activities.

 

[Mr Z]

Yes I understand that, if money is gold backed. But at present money is fiat.

I guess my question is how to find the intrinsic value of gold, in fiat.

What are some valuations on this basis?

It is a relative thing, while there is no trusted alternate, we have negative real rates and the major economies are in a stagflationary condition then gold will increase in value in FIAT terms as it is natural money. You cannot fix any theoretical target in FIAT because FIAT is a rubbery measure that is under pressure and constantly stretching. Anyway, as soon as trusted investment alternates can produce a real return then gold will lose its market. IMO Asia ends this gold bull market when it opens its financial markets and builds, integrity, transparency and trust to the degree that it is the logical destination for rent seeking capital. For now, with the condition of the European currency and banking system and the enviable wall of new currency that the US has to throw at its system (only a couple of months until a new debt limit ceiling rise!) and the condition of its banking system is it any wonder that gold will be popular as an alternate to FIAT.

Anyway... to answer that question you have to constantly ask yourself what is the big money going to do. When Volcker turned up in the last gold bull and cranked interest rates to a level that would "suck money from the moon" you had the conditions to kill the gold bull market. That is the interest exceeded the expected inflation rate one year forward by sufficient margin to reward capital for any risks involved in lending. When a similar condition arises and capital can get a secure return over the rate that government and credit are inflating money supplies then gold will reach its peak. We are not there yet, unfortunately, I would dearly love to head off in another direction but it looks to me like we have a long time to go down this road before we get a decent prospect of a turnaround.

So far it seems that many of the higher rates of return that can be achieved are not considered secure looking forward. US rates are a joke and there is no way that the US can do a Volcker this time around. Europe's system is just plain challenged and the only strong currencies in town have been called into question because of shorter term doubts over Asia's ability to keep on keeping on in the face of two major economies stumbling. Where is a dollar to go? What is safe?

Personally I think that the responses by government to this mess will, in the mid term, drive all tangibles and related companies and instruments. Gold is the number one tangible when it comes to a portable store of wealth that is no one else's obligation, so it is very hard to see why it all stops here.

 

[Billyb]

Every bull market ends badly, and every "great bull market", ends in a devastating crash. Especially when the participants believe "this is different".

If you don't understand that, you are a fool,

I wont respond the the immature personal attack except to say that obviously every bull run ends, everything in the world eventually comes to an end, even a toddler can understand that.

You don't understand the trend followers paradigm. Go read about Ed Seykota. He's done very well not trying to make trading decisions based on futile predictions of the future. He looks at a chart from the other side of the room, if it's going up, he wants to be on it. He acts on the objective information available rather than some horrific picture of 'what could happen' that's running around in his subjective mind.

And "what" will happen is a big Correction in the gold price, "When" I don't know, I will leave that to you guys to find out. ( my feelings are within 12months, But as I said thats just a feeling not based on any facts )

Well I suppose that's a fine example of investing decisions based on subjectivity. At least you are not risking any capital in this case...

 

[disarray]

Every bull market ends badly, and every "great bull market", ends in a devastating crash. Especially when the participants believe "this is different".

If you don't understand that, you are a fool,

sounds like property.

p.s. you are being an annoying douche with your endless personal attacks and oh so smug sense of intellectual superiority. get over yourself. or head over to the property thread and hang out with medicowallet.

 

[Tysonboss1]

Note, I said that it will end badly but I have no idea "when", my disclaimer was that any time frames I gave were not based on fact and were just a personal feeling. I did not say my investment decisions were based on feelings and not facts.

Also please note that most people buying into gold are using a trend following approach, once it is clear the bull run is over they will all be heading for the door and it is mathematically impossible for them all to get out at a profit, the crash will be hard and fast. Who will you sell to when all the buyers become sellers,

 

[Tysonboss1]

sounds like property.

p.s. you are being an annoying douche with your endless personal attacks and oh so smug sense of intellectual superiority. get over yourself. or head over to the property thread and hang out with medicowallet.

Yeah except property doubled and it was called a bubble, gold went up 6 times and is some how being called a stable store of value here.

This thread needs an opposing view.

 

[explod]

Yeah except property doubled and it was called a bubble, gold went up 6 times and is some how being called a stable store of value here.

This thread needs an opposing view.

Opposing is fine, but give us some substance?

There is far more to gold than what the charts are saying

 

[disarray]

Yeah except property doubled and it was called a bubble, gold went up 6 times and is some how being called a stable store of value here.

This thread needs an opposing view.

once again, gold isn't going up in value, fiat money is going down.

 

[Billyb]

Note, I said that it will end badly but I have no idea "when", my disclaimer was that any time frames I gave were not based on fact and were just a personal feeling. I did not say my investment decisions were based on feelings and not facts.

Also please note that most people buying into gold are using a trend following approach, once it is clear the bull run is over they will all be heading for the door and it is mathematically impossible for them all to get out at a profit, the crash will be hard and fast. Who will you sell to when all the buyers become sellers,

By your flawed logic we should all avoid bull runs out of fear that 'the crash will be hard and fast'. What flawed logic.
There was plenty of time to get out of the ASX bull run 2003-2007 and be in cash during most of the GFC. Your mind is just full of worst case fear-based scenarios, that's all.

Edit: Yes the crash could be 'hard and fast', anything can happen; but we're dealing with probabilities here. That's what risk management and diversification is for.

 

[Mr Z]

Also please note that most people buying into gold are using a trend following approach

You know this how?

In fact the more likely case at this stage in the market is that the bulk of the money that is now in gold is there for well researched and fundamentally sound reasons. You are more talking about a market that has gone into the overreach phase... say like Australian residential property.

You are making assumptions about the phase of the market we are in, seemingly without having done any research. All the while covering your bum with a WHEN... yes at some point gold will get over done.... well over done, but that is not now.

 

[Mr Z]

Yeah except property doubled and it was called a bubble, gold went up 6 times and is some how being called a stable store of value here.

This thread needs an opposing view.

That is funny.... I can point to many examples of land that have gone six times or more! Regardless, since when has it been appropriate to compare a market like gold with real estate? Real estate will typically never do the over or undervaluation that an asset like gold can achieve. Mind you, in this last 20 odd year run it has excelled on the over side like never before and on deteriorating fundamentals... classic over reach.

 

[wayneL]

once again, gold isn't going up in value, fiat money is going down.

Agreed, but how do we quantify the relationship between gold and fiat, sans speculative input?

Is fiat worth 20% of what it was 10 years ago?

If so, I'm putting my prices up!

 

[disarray]

Agreed, but how do we quantify the relationship between gold and fiat, sans speculative input?

ask the developing economies. they're the ones stockpiling the stuff and prepping for the overthrow of the US petrodollar paradigm. i think some form of gold (or commodity)backed system is likely, at least during the transitional period from the old financial system to whatever one emerges from the wreckage of this one, so i suppose the price of gold will be the amount of money needed divided by the required (and agreed) percentage of physical holdings.

 

[tothemax6]

Yeah except property doubled and it was called a bubble, gold went up 6 times and is some how being called a stable store of value here.

This thread needs an opposing view.

Indeed, no point in a thread full of clones.

But you seem to make out that owning gold as an investment is completely unjustifiable, as I understand it 'because it produces nothing'. And if I'm not mistaken this is because you basically model your entire investment philosophy on Warren Buffet & Ben Graham word-for-word.

However reality is that stocks are not always the best asset class. The evaluation of your stock holdings over the last 6 months has gone down. Threats of deflation, recession etc are negative for stocks (regardless of ROE valuation etc) and commodities, and positive for bonds. People who bought 10y treasuries at the beginning of the year are laughing. Threats of inflation are negative for bonds, positive for stocks, and very positive for commodities, esp gold.

The current gold rout has been triggered by the US central bank indicating it will not print more money (at least for now) in spite of the worsening economic climate (which had caused them to print in the past). Up until this point, both the bond market and the gold market had been going ballistic - an odd situation. It indicated very high uncertainty - the bad banks and piles of bad debts were still there threatening heavy deflation, but the central bank was there simultaneously spewing money - threatening inflation.

However we still have the same problems, regardless of the noises that come from central banks. Europe is still a basket case, with heavy political pressure to simply monetize all the bad sovereign debts. Japan has no credible way of reducing its debt. The US has no credible way of reducing its debt.
Will people hold risky government debt in a money printing environment at today's negative real yields? For how long? Either they will go for gold or the world has gone mad and 2+2 is now officially 5.

 

[Aussiejeff]

Will people hold risky government debt in a money printing environment at today's negative real yields? For how long? Either they will go for gold or the world has gone mad and 2+2 is now officially 5.

The second option....a New Formula For Economic Stability has been created this weekend by the G-20, no doubt after consultation with our very own economic genius - World's Greatest Treasurer.

We are all saved.

Meanwhile, gold plummeting.....

 

[Mr Z]

The fact is that short term US gov debt is now the defacto bank account for anyone needing to park billions in a hurry. You simply can't leave it at the bank now can you? A banking system in crisis is ideal support for the short end of the curve.... for now. IMO the Fed will become the egg man at the long end of the curve leaving it flat.... financial repression 101.

 

[TabJockey]

Gold is falling because it is a risk asset. People are taking their profits on gold, gold ETFs, gold futures to go into cash.

If you believe in the long term fundamentals of gold then perhaps this is a buying opportunity for you, just like shares or any other asset you can make a case for under valuation at the moment.

Also the people who bought gold as an inflation hedge are selling because the perceived inflationary risk is lower, deflation is considered to be more likely in the near to medium term.