The price of Gold


#1

I’ve noticed a certain correlation between posts predicting a fall in the price of houses in the English-speaking world and posts predicting a jump in the price of gold.

There’s a certain logic to this: the “money supply” exists in the form of bank loans, such as for houses, and expands globally at anywhere between 7 and 15 per cent annually. This expansion of loans is hugely in excess of any actual economic growth occurring on Earth.

The theory is that, as gold is highly limited, its value should grow as it gets more scarce in paper money terms each year.

The counter argument is that gold’s price did precisely the opposite from 1980 to 2000. Many argue that gold is simply a pretty jewellery fabrication material with a very few industrial uses. It’s simply not worthwhile to use it as an absolute measure of worth any more, if it ever was.

Since 2000, its price has almost trebled, however.

So do we take that as meaning that gold’s role as an alternative type of money to bank loans is back, or is this just a blip?

Who here wants gold?


#2

Peiople fleeing the wars in the middle East and Africa want gold.


#3

gold does have some store of value as well as commerical/industrial uses.

Its relevance as a hedge against inflation can be a tad overblown and somewhat historical in significane…

One can see that over the 100 years, gold has more or less tracked inflation in the US market, indicating that as an investment it has little merit, but as a protection from inflation it can be quite handy, as well as a play on geo-political stabilty, as the correlation betweent he international politcal stabilty coefficent (strangely enough they claim to have one of these!!) and the price of gold are strongly negatively correlated.

at the moment, asset classes such as equities and property are high risk and as such gold is a good play to accrete in value relative to these stock, but not massively and it is extremely volatile…so tread carefully…


#4

Gold may (may) be a good investment in these times, but most of those I see discussing gold as an investment seem to me to offer up very superficial reasons for doing so. It ranges from those who buy a small sum of gold (or mining stocks) as part of balancing a portfolio, to those in Idaho who stack gold alongside the tin cans and ammunition in their nuclear proof bunkers.

Is it a currency or a commodity? It’s a mix of both - as an investor I can easily work out the value as a commodity (supply vs demand), but as an investor I can’t work out the currency value as it seems to be based entirely on sentiment. Maybe if I was a psychologist.

So to cut a long story short, yes it may be worth investing in but unless you really know what you’re doing I would avoid investing large amounts in it.


#5

As it happens I do have krugerrands in a safe deposit box in London. Bought 'em at USD530 and they’ve grown just over 20% since then.

I personally buy into the theory that, as gold is a massively limited commodity and will continue to be heavily used in jewellery in addition to its currency value, the up move will be with us for a long time.

Ultimately, gold will not even have properly started to enter a bull phase until it reaches its 1980 all-time high of $800. Of course, that would mean about $2000 to account for inflation in the last 27 years.

It was 250 in 1999, 400 in 2003 and 650 now, so I feel it’s on course


#6

thats optimistic,

since the breakdown of the bretton woods in 1971, gold has followed inflation.

Some years up and some down.

Its only now catching up with the infaltion adjusted price from the early 1970’s, so no money on it yet.

Bear in mind its falling demand as a “jewelry” item due to more desireable materials currently available and the fact that jewelry isn’t exaclty recession proof…


#7

As far as I’m aware it’s being used up in jewellery and electronics at a faster rate than it’s being mined. Therefore, like oil (which is in a similar position re: use vs new production) it’s attracting a scarcity bonus.

Look at how the futures markets see it:
[quotes.tradingcharts.com/]
(https://quotes.tradingcharts.com/)

Industrial metals like copper and aluminium fall in value as you look forward to 2011.

Yet gold, which the anti-gold investors state is simply another metal rather than a semi-currency, is being sold forward to 2011 for over $800.

Seems reasonably bullish to me.

Also, I’d have to say your facts are faulty: gold hasn’t tracked inflation.

From 1980 to 2000, gold was flat, even though the value of money collapsed so much that $10 in 2000 would only buy what $3 would get in 1980.

It broke out of that negative trading range after it hit rock bottom in 1999.

The theory is that central banks spent the period 1980-1995 basically dumping gold on to the private market, to decouple paper currency values from gold reserves, thus allowing paper currency values to appreciate without having to mine and refine gold.

Incidentally, the annual average price of gold in 1980 was $612, so if you like, gold has just reached its all-time high, as the 52-week average is above $620.

I think the futures markets are underestimating gold’s likely 2011 value, and that $1000 is a more realistic measure, but $1800 would be a reasonable inflation adjustment.

However, it’s likely that tons of investors like me will take their profits at the 1K mark and thus slow the upward move.

Some people will come out of this property boom very rich indeed, as they will have sold, luckily or cleverly, at the right time.

I think they’ll want a little gold to put that dosh in.


#8

cant’ upload a graph.

but,
1913 gold was 20.67., this adjusted for inflation is 420.51

2005 market price was 444.47.

no increase

from 1971 onwards gold has been over and above its infation adj price, dropping back in 1996 where it has remained under as world economy has been bullish.

on recently breached this…

also
lbma.org.uk/2007gofo.htm

the gofo rates are sub libor, indicating a decreased yield on holding…
therre has been alot of speculation on the role some of the central banks have been playing with regard to gold and inflation…check out google…

commodities markets esp on gold is so open to makret manipulation, esp in the futures, and this is why very few touch it…cos some of the big boys can bounce the market as they so choose.

Results from a daily closing mkt mid rates regression is

3rd Equation: Monthly Data 1984 – present:
The equation obtained was
_CHANGEGOLDDIFFERENCED = 1.54464053DIFFINFLATIONRATE(-4) - 1.939747823DIFFINFLATIONRATE(-5) + 0.6713185798*_PERCHANGEM1 + 0.1579450576*_CHANGEGOLDDIFFERENCED(-1) - 0.159267424*_CHANGEGOLDDIFFERENCED(-2) + 0.0001065041233

where the lagged inflation data is monthly.


#9

I seem to recall that in 1913 coal miners were paid at a rate of 23c/hour, which was a good rate at the time (although the miners saw very little of that money after deductions). With your inflation measure that comes to the illegally low wage of $4.60/hour

I think that, to call anything a “good wage” in 2007, you’d have to be making at least triple the US minimum wage of $5.15.

So, taking real inflation in the costs of living into account, we’re looking at a proce rise in the 60x range at least, so that’s bring gold to around $1300

Or we could split the difference between your measure and mine, call a “good wage” the pittance of $10.30 an hour and that should lead to a price around 40X 1913 price or $826.8.

I see some sites on google’s cache showing grocery prices in 1913, porterhouse steaks for 35 cents US, for example.

A 40x rise in that approximates to what I paid for a (raw) porterhouse steak last week.

Edit: OK I know that this is cheesier than Edam, but gold finished the day at a 3-week high over $40 above the 1980 average. Yes, I know that means less than the dustmites under my left little finger, i’m not stoopid!


#10

Gold spiked heavily this Monday morning, wiping out Friday’s fall. Its 14-day moving average is upward. It is up 18% year to date. The forward delivery price for june 2007 is $669.50 per oz, up $6.


#11

gold/silver/platinum/palladium are the new property to own in at least some small form to cover oneself as inflation creeps higher on the paper money we all love.

however of course nothing is guaranteed - taken from Wikipedia - “From 1980 to 2001, gold was a poor store of value, as gold prices dropped from a high of $850/oz. to a low of $255/oz. The advantage of gold and silver, however, lies in the fact that, unlike fiat paper currency, the supply cannot be increased arbitrarily by a central bank.”


#12

The “$850 high” is possibly factually correct, but hihgly misleading.

Virtually nobody bought or sold gold in 1980 for over $830. It was a super-short, momentary spike.

In 1980, $850 was worth what €2000 is today.

In fact, the average price in 1980 was $612 per ounce. And yes, from 1980 to 2000 gold plummeted in relative value, hitting its bedrock of $250 at the height of the speculative boom in dot-com stocks. Then it climbed steadily upwards.

The amount of money in the world is around $50 trillion. Assuming an extremely low inflation rate of 2.5%, that figure will be $100 trillion in 28.8 years. In another 28.8 years it will be $200 trillion, and after 86.4 years it will be $400 trillion.

And assuming that the world’s gold supply grows at its steady 1% per year, there will be 86% more gold but 800% more paper money.

But it’s highly unlikely that so much gold could be mined at that rate. South Africa’s output is collapsing, and there are few other mining areas picking up the slack.

Of course, if inflation averages a mere 3.6%, the money supply will be 400 trill in 2067.


#13

Guessing game for goldbugs:

Imagine all the gold which humans have ever mined in 50,000 years of history were gathered into one solid cube of gold: how long would one side of that cube be? (Remember, all sides of a cube are of equal length)

Would one side of the cube be:

a) Longer than all the following lengths;
b) About the length of a full-size airport runway;
c) About the length of a football pitch;
d) Shorter than the preceding lengths.


#14

I guess nobody gives a damn, anyhoo, Reuters sez:

Some London investment bank bought gold like crazy today. They probably got burned selling it short and now have to come up with physical delivery.

On a day with great geopolitical news about Iran releases, it’s almost unheard-of for a safe haven asset to spike upwards.


#15

There is elation and despair in the gold investors’ market right now, based on the following technical chart:

kitco.com/charts/techcharts_gold.html

Despair because the price still has not retaken the $700 mark which it hit over a year ago, and prices are trending solidly downwards, with the Swiss and Spanish central banks selling large amounts of gold, albeit at a good profit.

Elation because, despite the recent downtrend, the 200-day moving average has not been breached. That’s quite a bullish sign, usually.

If that average goes, there’s a consensus that gold could fall to 600. Or bargain-hunters could jump in pulling it to 650 or above.


#16

#17

Regardless of all the bullish arguments for gold, and they are legion, the yellow metal is steadfastly refusing to appreciate so far.

The only positive for goldbugs right now is that the metal has not yet fallen below its long-term (200 days) moving average. Silver has already breached this average.

However, silver is very bulky, while gold is small enough to store cheaply and fairly safely. That may explain why it’s being sold - falling price plus cost of storing so many bars mean it’s more cost-effective to unload it rather than hold and pray for an upturn.

I’m thinking of unloading some of my own gold and sticking the proceeds into Rabo. Time to take the hit.


#18

Gold is dead.

Well, maybe not, but it’s not moving much. Right now down 3 dollars from yesterday’s high, despite the fact the the dollar has tumbled.

So Gold is even cheaper in Euro and Sterling. Then again, it could adjust to the new currency situation.

The gold fanatics are, as always, screaming that the market is manipulated and paradoxically, that these omnipotent manipulators are destined to get burned viciously soon.


#19

Gold leapt again after Bernanke pointed out that, in an economy where people are getting their homes repo’d all around 'em, a slowdown is on the cards.

Basically, I’m glad I “chose” not to sell last week (wasn’t an active choice, was just too bone idle to bother putting them on ebay).

Even if the USA never ever goes into recession, I reckon the fear of it doing so will drag gold over the €550 mark before too long.

It’s amazing just how disconnected gold is from all the other major global market events. I guess that’s a function of just how few players are involved.

Think about it, the value of the entire global production of the planet is a lot smaller than Ireland’s GNP. :open_mouth:

PS: yes, I’m aware that this thread is rather dominated by yours truly, but I reckon it’s better than nobody posting on this topic. It’s a vital barometer of the times, and forewarned is forearmed yada yada


#20

Rock3r wrote

I know very little about the stuff, but am keenly following the thread! Thank you for sharing your thoughts.