Gold Price - Where is it heading?

[Uncle Festivus]

The bigger picture - it's all relative....

 

[zac]

I guess ultimately, given that gold is an inflation hedge, its not surprising the inflation adjusted data is rather steady.
Investing in gold is more for preservation of wealth rather than growing it.

 

[dengo]

The bigger picture - it's all relative....

 

[DeepState]

Price of gold is almost through the bottom end of the all-in cost curve. There must be a supply response at some stage?

 

[DeepState]

I guess ultimately, given that gold is an inflation hedge, its not surprising the inflation adjusted data is rather steady.
Investing in gold is more for preservation of wealth rather than growing it.

That's an interesting observation. The Gold price spike from the early 70s was OPEC1 [Yom Kippur related Oil Embargo] and the late 70s from OPEC2 [Shah of Iran] which entrenched inflationary expectations. Coupled with a somewhat misguided monetary policy [Phillips Curve] it led to high inflation. Volcker came in and inflation gradually became more tamed as inflation targeting became the monetary policy of choice. With that, the price of gold fell in real terms.

More recently, we don't see inflation in consumer prices, but in asset prices. I find it strange that gold would rise to match it without an associated explanation that its rise has something to do with the loss of faith in a monetary system. If so, I guess I agree that it's about preservation of wealth - but perhaps in a different way.

 

[dengo]

Weekly MACD & RSI now below their center & support lines and bearish MACD signal line cross

 

[Uncle Festivus]

It really is this simple?

Each red line marks the first week of July & January.......

Move along, nothing to see here - at least until July?

 

[explod]

Okay, time for a dust off here IMO.

With negative interest rates appearing in the euro zone are we going to see a run on the banks and then a lockdown?

Could be a run for gold soon hey.

 

[DeepState]

Okay, time for a dust off here IMO.

With negative interest rates appearing in the euro zone are we going to see a run on the banks and then a lockdown?

Could be a run for gold soon hey.

Hi

Negative interest rates have a minor effect for EZ. You will not see a run on banks etc. I could go into a whole pile of technical points on this, but let's not unless you are genuinely interested in it. The bottom line is that ECB in presently in the process of undertaking an Asset Quality Review of the major banks in conjuction with the central banks of each member of the EU and bank auditors. Given the timing of the report delivery, high level knowledge of the asset positions would already be largely known. Given this, the ECB would not be so stupid as to take an action which would plunge the banking system back into the abyss. You will notice that lines have not formed around the block with people desperate to pull their deposits out upon the announcement of this initiative. Credit spreads actually compressed (slightly).

Nonetheless, the negative deposit rates on excess reserves is a prelude to a larger QE style of stimulus. This is normally associated with gold price increases as per what happened in the QE programs conducted by the Fed. It is also associated with the depreciation of the currency in which the QE is posted, a la Japan.

With gold now at prices which are at the bottom of the all-in production cost curve, supply response is inevitable unless a price rise occurs.

This argues for a rise on gold price vs Euro. We have seen the EURUSD weaken as the case for QE has grown stronger with data releases and indications that Weidman and co will acquiesce to looser monetary policy. What we have not seem is a rise in the gold price. This might be because of the wind down of Fed QE. We do not know the size of the programs which may come into place in the EZ. At this time, it appears that BoJ will also need to accelerate its printing as well and Japan is printing as much as the Fed at the moment. It is quite possible that QE liquidity being added to the global monetary system when the ECB comes to the point will exceed the Fed print.

Although geopol concerns related to Syria, Ukraine, Iran, Thailand are brewing, these are unlikely to sprout into a hot war at present. However, developments in the South China sea and East China Sea, in particular, involve nationalistic super powers in direct confrontation. These are very dangerous and the fault lines are under considerable pressure.

So, for reasons not related to a banking crisis following from the most recent ECB moves, I tend to agree with you that gold (denominated in Euro) has some tail winds.

 

[PipSafe]

As it was mentioned in the previous technical analysis of Gold dated 2014-06-03, according to the formed technical signs, there was the potential for ascending of price which finally happened. Buyers were successful in achieving the highest price of 1263.59 .Right now price is above 5-day moving daily time frame that show an uptrend during the next candles. According to the formed movements in price chart, between the top price of 1388.86 and the bottom price of 1240.73, there is a none-ideal AB=CD harmonic pattern with the ratios of 50% and 161.8% that warns about ascending of price from D point.
Stoch indicator with the ascending cycle confirms the D point of AB=CD harmonic pattern and warns about the potential of ascending during the next candles. If price rises and buyers success first of the price targets would be alterant level (Change of polarity)of 1269.54.Right now in long term time frames such as Monthly and weekly, there is not any clear reason for decreasing of the price and generally until the mentioned bottom price is preserved, there is the potential for downtrend reformation.

Technical Analysis of Gold dated 2014.06.10

 

[tinhat]

(Change of polarity)

She can'na handle it captain.

Interesting analysis. Could be a triple bottom about to form. Time will tell. Where to from here? I can't smell.

 

[Value Collector]

The bigger picture - it's all relative....

View attachment 58141

So it's still about 30% over valued compared to the 1970 inflation adjusted price,

Nice chart, it really just shows how terrible holding gold has been long term.

44 years of no growth and no cash flow, makes me shudder.

 

[DeepState]

So it's still about 30% over valued compared to the 1970 inflation adjusted price,

Nice chart, it really just shows how terrible holding gold has been long term.

44 years of no growth and no cash flow, makes me shudder.

Please be careful with those conclusions, although what I am about to say is not a forecast on Gold.

The chart shows Gold price adjusted for the 1980 CPI definition. This is a ploy played by the conspiracy/anti-government agency set which claims that subsequent CPI basket revisions are a total sham. Whilst some elements of the CPI reconstitution is discretionary, the greater part of the adjustments represent changes in what is actually consumed. There is a big difference between measuring CPI based on a basket of goods that was relevant in 1980 and thinking that this basket remains relevant to present day when we were still using VHS/BETA. We substitute goods when something we sort of like become cheaper than something we like. We replace entire categories which had not ben invented. Mobile phones are pretty darn cheap...seen the one which Gecko carried? And on it goes...

Also Gold is primarily a store of wealth. It is so even by those who hold it in the form of jewelry. This is sold in hard times and there is an active market of such in India and elsewhere. After Bretton Woods, the US wangled a deal to make its currency the central point for convertibility of other currencies and was anchored to gold. It was meant that USD and Gold went hand in hand. Even when Nixon kyboshed the whole deal, gold remained and remains a form of currency. Its closest substitute remains the USD and this is habitually enshrined by the fact that its price is normally quoted in USD. Both (or close substitutes thereof) are held in CB vaults (well, not exactly) in substantial volume.

Has gold been a bad performer...relative to its closest cousin being USD deposits? The following chart shows the real return on the Fed Funds rate after allowing for 30% tax (the chart would have ended at around 2 if no tax allowance were made). It is negative. Gold, I think, if held from 1970 to now, would not yet attract tax if still held and would attract a lower capital gains tax if we think about this from an Australian dollar perspective. Basically, I believe that Gold, as an alternative currency to the USD, actually did its job over this time period. It provided protection during period of high inflation and quantitative easing in the Plaza Accord and more recently. Overall, it has provided a better real return than the cash rate. Not too shabby.

Though you've not said it...I agree with you that the kinds of returns we can expect from this are not like other markets. This is a currency alternative to the USD for the most part.

Please see below the deflated performance of the Fed Funds rate after allowance for 30% tax and using the official CPI formulation as the basis of adjustment.

 

[Value Collector]

Also Gold is primarily a store of wealth.

Yes, but it is not a particularly good one. There are many non cash assets that you can hold that will perform as long term stores of value, that also generate revenue, which puts them well ahead of gold, and the longer the holding period, the worse gold will appear in comparison.

It is so even by those who hold it in the form of jewelry. This is sold in hard times and there is an active market of such in India and elsewhere.

yes, but for a fraction of the cost they purchased it for.

Basically, I believe that Gold, as an alternative currency to the USD, actually did its job over this time period.

I believe gold is a precious metal, not a currency. But even if I give it currency status, I don't want to store my wealth in a currency, I would much rather store my wealth in an asset that produces currency, while my capital value has the same inflation hedge as gold.

Overall, it has provided a better real return than the cash rate. Not too shabby.

I don't really see how your getting that, it's only 30% higher now than it was in 1970, surely compounding the after tax interest from a term deposit for 44years will see a higher return than 30%. even an after tax return of only 2.5% puts $1000 at nearly $3000 (and interest rates went quite high at some points).

Not only that but the return on a term deposit was nice and steady, where gold did nothing for years and then peaked in the last 10years of the 44 year term.

 

[DeepState]

1. Yes,

2. ...but it is not a particularly good one. There are many non cash assets that you can hold that will perform as long term stores of value, that also generate revenue, which puts them well ahead of gold, and the longer the holding period, the worse gold will appear in comparison.

3. yes, but for a fraction of the cost they purchased it for.

4. I believe gold is a precious metal, not a currency. But even if I give it currency status, I don't want to store my wealth in a currency, I would much rather store my wealth in an asset that produces currency, while my capital value has the same inflation hedge as gold.

5. I don't really see how your getting that, it's only 30% higher now than it was in 1970, surely compounding the after tax interest from a term deposit for 44years will see a higher return than 30%. even an after tax return of only 2.5% puts $1000 at nearly $3000 (and interest rates went quite high at some points).

Not only that but the return on a term deposit was nice and steady, where gold did nothing for years and then peaked in the last 10years of the 44 year term.

G'day VC

We're mostly on the same page. Just a technical clarification, which was the key reason I wrote the prior post. Anyhow:

1. It has been a traditional medium of exchange and has what people think are reasonable properties for a currency when all else fails. If you are fleeing some nasty situation, we carry gold and precious stones. Everything else is too heavy and cumbersome. Anyway, that's what happens in war or hyperinflation. Money is as money does. In that sense, it is a store of wealth. You have reasonably argued that other things can be a store of wealth too.

2. Doesn't make it the best medium of exchange imaginable. You will always be able to find something better. But, if we are fleeing and don't trust money anymore then CFD, stock and bonds isn't going to buy you or your friends/family passage. Gold is a deep out of the money put on the functioning of an economy and society. The returns will look rubbish relative to paper...until that day comes. Gosh I'm sounding like the people who pump out Austrian Economic doomsday stuff. I don't personally subscribe to the extremity of those views. But the use of gold as currency historically is a fact.

3. Not actually. There is a competitive market. They pay a moderate smelting cost where the jewelry is not pure (it would be too soft for the most part if so), then the spread you might expect for trading bullion at retail. But, to your point, that's still a wider spread than liquid instruments but pretty comparable to property. This stuff is a store of wealth for a rainy day which hopefully never comes. It is so for other domiciles, like China, as well.

4. No argument. I think the same as you. The caveat is that if the financial system melts (in hyperinflation, your financial assets will crash), those other monetary assets melt with it. Gold, it is thought, would remain money good and become money again. OTM put option again. It is kind of 'money in waiting'. If enough people believe it is money and accept as such, it becomes money. Nothing else is close when it comes to this, after fiat. Weird one for you. Many of the gold bugs out there discount gold mining at zero. Whilst there probably should be an allowance for production risk etc, the argument goes that since gold is money, no discount should be applied. You (and I) may not agree with this, but this is said with a straight face and seemingly believed.

5. Uncle's chart which you re-printed is CPI adjusted using 1980 CPI defintion. This was all I really wanted to point out originally..before adding further points (and receiving your thought provoking response). I previously outlined that the 1980 CPI figure is, in my view, a technical play which makes inflation unrealistically high. The source is ShadowStats. Feel free to read it if you want to get freaked out.

Hence gold has done well in absolute terms. It has risen in real terms despite having the book thrown at it via a spurious CPI definition. It would have risen by a lot more if using the official CPI. I showed a chart illustrating that Fed Funds (as a proxy, probably generous) as deposit rate adjusted by official CPI and tax. It lost value in real terms. So, whether you want to deflate gold by the 1980 CPI definition or official, gold has beaten cash by a reasonable margin.

Anyone is free to come to their own conclusions about the extent to which they believe gold represents an alternative currency and whether it has a place in their portfolio for investment or insurance purposes. The case has significant headwinds too. Nonetheless, I believe there is merit to the views that I have taken from others around the traps and extracted from as content for this and my prior post. That is not the same as saying I believe it absolutely.

Any Austrian's out there who want to chime in? Bring it.

 

[Value Collector]

Gold is a deep out of the money put on the functioning of an economy and society. The returns will look rubbish relative to paper...until that day comes..

I would be happy being the seller of those puts rather than the buyer, it's an expensive put to keep open.

Not actually. There is a competitive market. They pay a moderate smelting cost where the jewelry is not pure (it would be too soft for the most part if so), then the spread you might expect for trading bullion at retail. But, to your point, that's still a wider spread than liquid instruments but pretty comparable to property. This stuff is a store of wealth for a rainy day which hopefully never comes. It is so for other domiciles, like China, as well

.

Are you kidding me? go down to your local jewellery store, buy some gold jewellery, and then take it to a gold smelter and I doubt you'll get more than 20% of your cash back.

The caveat is that if the financial system melts (in hyperinflation, your financial assets will crash), those other monetary assets melt with it. Gold, it is thought, would remain money good and become money again

.

so would land, Your farmland or residential property is going to hedge hyperinflation just as good as gold, and you'll generate earnings.

 

[DeepState]

1. I would be happy being the seller of those puts rather than the buyer, it's an expensive put to keep open.
.

2. Are you kidding me? go down to your local jewellery store, buy some gold jewellery, and then take it to a gold smelter and I doubt you'll get more than 20% of your cash back.

.
3. so would land, Your farmland or residential property is going to hedge hyperinflation just as good as gold, and you'll generate earnings.

1. I have no idea how to value the implicit option other than through wobbly scenarios. Someone out there wants this stuff, and you aren't one of them. To this point, neither am I.

2. Again, I would have thought as you did. Except I actually knew about this when I was six in the bazars and shopping malls filled with goldsmiths. Further I actually checked before I wrote to get a current price. If you have a 1oz 18kt 'scrap gold' in the form of jewelry to sell, you would currently pick up AUD mid rate estimate (middle of bid estimates because purity varies from the label) of A$1350 implied for 1 oz pure gold. This is USD $1269. A 4% smelt spread from formed jewelry of this standard purity (In India, for example, purity is higher and a tighter spread is obtained).

These are somewhat smaller than your 80% spread estimate and in-line with what I was saying earlier. The spread in those bazars I was talking about was even tighter. Compare that to retail gold spread as bullion aside from Perth Mint and you will see what I mean when I say jewelry in the form of gold is given and bought as a store of wealth (apart from being shiny and wearable). This is for back of the drawer volume. That price is for an Australian location where you can collect it at the door at a CBD location or get it sent to you, postage and handling is extra.

3. You can't run with your farmland. When people are displaced and flee from their homes, how do you exactly use this asset? These are very extreme scenarios, but it explains why gold rises with geopolitical crisis. When you have inflation as a result of crisis, that is an entirely different type of inflation where real, fixed, assets will do as you are talking about. It doesn't have to be local. For example, if you are in investor in EM, it might make sense to hedge a left fielder where currencies get smashed and economic strife occurs. Many monster long term investors have some exposure to gold and other commodities for the reasons I have raised.

It's hard to value gold. It has no revenue, yield or earnings. Everything you say. Yet people buy it as a store of wealth, central banks hold it and so do a pile of investors. That makes it an investment/store just because everybody who is active in it thinks so. That's how norms develop and it is just the latest manifestation of alternative money, but I can see the argument for some limited holding. Fifty years of investing to come (and then some more when this gets passed to the next generation) is a long time. Things change.

 

[Value Collector]

2. Again, I would have thought as you did. Except I actually knew about this when I was six in the bazars and shopping malls filled with goldsmiths. Further I actually checked before I wrote to get a current price. If you have a 1oz 18kt 'scrap gold' in the form of jewelry to sell, you would currently pick up AUD mid rate estimate (middle of bid estimates because purity varies from the label) of A$1350 implied for 1 oz pure gold. This is USD $1269. A 4% smelt spread from formed jewelry of this standard purity (In India, for example, purity is higher and a tighter spread is obtained).

These are somewhat smaller than your 80% spread estimate and in-line with what I was saying earlier. The spread in those bazars I was talking about was even tighter. Compare that to retail gold spread as bullion aside from Perth Mint and you will see what I mean when I say jewelry in the form of gold is given and bought as a store of wealth (apart from being shiny and wearable). This is for back of the drawer volume. That price is for an Australian location where you can collect it at the door at a CBD location or get it sent to you, postage and handling is extra.

3. You can't run with your farmland. When people are displaced and flee from their homes, how do you exactly use this asset? These are very extreme scenarios, but it explains why gold rises with geopolitical crisis. When you have inflation as a result of crisis, that is an entirely different type of inflation where real, fixed, assets will do as you are talking about. It doesn't have to be local. For example, if you are in investor in EM, it might make sense to hedge a left fielder where currencies get smashed and economic strife occurs. Many monster long term investors have some exposure to gold and other commodities for the reasons I have raised.

It's hard to value gold. It has no revenue, yield or earnings. Everything you say. Yet people buy it as a store of wealth, central banks hold it and so do a pile of investors. That makes it an investment/store just because everybody who is active in it thinks so. That's how norms develop and it is just the latest manifestation of alternative money, but I can see the argument for some limited holding. Fifty years of investing to come (and then some more when this gets passed to the next generation) is a long time. Things change.

I am not talking about the 4% smelt spread, I am talking losing the retail margin and fabrication margin.

Eg. Buying brand new gold jewellery at retail prices with the expectation of melting it down in hard times will see you lose 80%, because the value of the gold scrap price makes up a very small part of the total cost of the retail price jewellery.

I don't think people here who have admitted loading up on gold are doing it because they fear having to flee, they are doing it because they think its the best longterm store of value, I am just pointing out that it is mediocre at best, and it's been smashed by pretty much every other asset class over any time frame you choose

 

[qldfrog]

anyone following the story of Germany trying to get back its billions of physical Gold from the US fed (which was taking good care of it) and agreeing togive up just recently
In a nutshell, the US do not seem to have/own it anymore!!!

 

[DeepState]

1. I am not talking about the 4% smelt spread, I am talking losing the retail margin and fabrication margin.

Eg. Buying brand new gold jewellery at retail prices with the expectation of melting it down in hard times will see you lose 80%, because the value of the gold scrap price makes up a very small part of the total cost of the retail price jewellery.

2. I don't think people here who have admitted loading up on gold are doing it because they fear having to flee, they are doing it because they think its the best longterm store of value.

3. I am just pointing out that it is mediocre at best, and it's been smashed by pretty much every other asset class over any time frame you choose

Just wrapping up, I think. Thanks for the exchange.

1. That's a very fair point. So I looked some more. You can get an 18kt bracelet (just for example) on line for AUD 488 whose underlying gold value is AUD 471. So, full spread is 7.5%, comparable to a property. This bracelet only had gold content of 10.5 gms. I have always been utterly amazed at how low fabrication costs are. Shop front is another matter but my actual experience buying this stuff in Asia is that gold is sold by the weight and purity with design not mattering much at all. The cost isn't too far above spot bullion as per this example. Maybe rent and wages are much lower. But that's the area where gold is mostly given in the form of jewelry in weddings and births as a store of wealth for a rainy day. VC, it really is a store of wealth to this population. It is not conjecture on my part. I witness it up close and personal. It is material.

2. You should check out the gold discussion sites frequented by Australian gold bugs...OMG. When the GFC came to be, gold spiked. People thought money would die. They weren't expecting to flee....the demand for safes went through the roof and the Perth Mint saw strong demand for gold at vault to be segregated from the pool and/or transferred to the owner. In a developed nation which is secure like Aust, you are absolutely right that we would not do this in the [central] expectation of fleeing. But somewhere else in the world, where you might have investment exposure, someone would really be fleeing. They hold and demand gold. This is the same gold as that in our (metaphorical) vaults. It affects the price.

3. Gold HAS performed in a mediocre fashion against anything other than cash like instruments. Like I mentioned from the outset, it is a currency substitute. It has performed accordingly because the closest thing to a world currency is USD and my chart demonstrated it basically did a little better. USD was once banded with Gold. Gold was the standard by which currencies were linked for a good part of the 20th Century. It is a precious metal that serves as a store of value and, if things should melt, probably be the next choice as a currency for a time. Personally, I would not make my investment decisions on the basis of historical return observation. I'm sure you do not either.

The Austrians (I am not one, but enjoy their view) would argue that what you have observed is asset prices pumped up by an unsustainable credit binge. That it cannot be sustained and will ultimately come undone. In its wake, gold will shine. Maybe. I'm not making a strong statement either way.

Thanks.