The Year in Gold: 2011

2011 was a volatile, roller coaster ride for gold. It saw a price spike up to $1,900/oz, followed by a crash into the end of the year, finishing at $1,566/oz. The price change for the year was +10%. Despite the year end crash, gold outperformed all global stock markets by a wide margin, and beat the S&P 500 for the 11th year in a row. The S&P was essentially flat for the year, the FTSE was down over 5% and the Nikkei down 17%.

Gold vs. Money Supply

From the early 1980s until 2001, the monetary base grew faster than the gold price. That trend reversed when the gold bull market started in 2001 and continued until the US financial crises in 2008. After 2008, the monetary base grew at an even faster rate, but then leveled off in 2009. I find the comparison to the monetary base interesting because in the original Federal Reserve Act, the monetary base was limited by the amount of gold held by the Treasury. That legislative link was broken in 1971. The gold price has fared better against M1 and M2, nearly reaching their peak ratios from 1980 before easing back.

Gold vs. US Debt

I started modeling the gold price against US debt with surprisingly good results. The longest model I have is one going back to 1971 when the official link of the dollar to gold was broken by President Nixon. At that time, the official price was $35/oz.

Using a linear regression of the data back to 1971 (above), I get these predictions:
Two sigma below is $813.24
One sigma below is $1,035.33
The best fit price is $1,247.82
One sigma above is $1,460.30
Two sigma above is $1,682.40

These prices may be the best long term guides IF the United States can get control of its fiscal situation again, which requires control of its political situation again. Unending trillion dollar deficits is not the path to a stable currency and fiscal situation.

The more recent model that coincides with the gold bull market since 2001 has a higher correlation, for now. Using a linear regression of the data back to 2001 (above), I get these predictions:
Two sigma below is $1,423.85
One sigma below is $1,508.73
The best fit price is $1,592.00
One sigma above is $1,675.28
Two sigma above is $1,760.16

These numbers add some perspective to the $1,900 price seen in August, 2011. Of course, markets pay no attention to statistics or models in the short run or even the medium term. Humans don't work that way. I speak from experience. YMMV.