Thursday, December 29, 2011
Gold: No More Love
Gold prices, since peaking in August, have been dropping like a burst bubble, and maybe that is what is happening. I am still on the fence about that. After the momentous rise and crash, I was unsure of what was unfolding so I sold half at $1,654. This morning, we bounced off $1,530 again, the spike low from the initial crash.
My debt vs. gold model predicts a best fit gold price of $1,578. This is the first time since early 2009 that the spot price has been below my model price. One standard deviation below would be $1,409. I am content to sit in my physical position for now, until and unless it becomes clear that interest rates are rising and central bank money printing is over. Neither of those conditions is true today. What is true is that speculators have been destroyed and sentiment is in the toilet. Gold gets No More Love...
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I think I can point you to one problem with your model.
ReplyDeleteWhat would your model predict the price of gold to be if the debt was zero?
It looks to me like the price of gold would be roughly negative $500 per ounce. You'd have to pay people to take it from you. Clearly that would not be the case in the real world.
Put another way, if you can't extrapolate the seemingly perfect trend line back to the origin and have it make sense then you probably can't extrapolate it forward into the distant future and expect it to make sense either.
In my opinion, your second chart (going back to 1971) makes a bit more sense (doesn't just use the latest gold bull's data). We're still about as far above the trend line as we were during the last gold bubble (although not in percentage terms so the potential bubble probably isn't as big).
Just a thought.
Mark,
ReplyDeleteYou could very well be right. I'll update both models and charts in January.
My only problem using the 1971 model is that I can't figure out how we get the dollar back to respectability. The dollar became attractive and killed inflation in 1980 after interest rates were raised far enough above inflation. Even with relatively benign 3% inflation, that would imply interest rates in the 8-10% range.
I don't see that for a long time. The US NEEDS to deflate it's debt with a big inflation first. I believe that is what gold has priced in, sans the summer bubble spike and crash.
I still lean toward gold making a comeback in 2012, but I could be wrong which is why I sold half a few months ago.
I guess I'm more perma-gloomy (à la Japan). We can maintain a huge debt if we keep inflation tame and interest rates at 0%.
ReplyDeleteMeanwhile, we never truly recover. Sigh.
Japan is weird due to their ability to fund their debt with 90% internal purchases. I don't pretend to understand the thinking of the Japanese people that are happy to buy 10 year bonds yielding under 1%. Due to demographics, pension funds are starting to liquidate JGBs out of necessity. This will force the BoJ to monetize more. How they keep the game going when all taxes are consumed by interest payments will be interesting.
ReplyDeleteI think the demographics and politics of the US are too different for an exact Japanese outcome here. I think we are too impatient and will demand drastic action to get out of our funk. Who knows?