His reasoning was not new, but it was refreshing to see a succinct summary rather than the ranting of gold mining company CEOs (Mark Twain once said that a mine is nothing more than a liar standing next to a hole in the ground and screaming). He listed 7 main drivers of the gold price:
- The US dollar must decline further
- US dollar reserves are “excessive”
- Gold is relatively “cheap”
- Monetary reflation is coming
- Supply is limited
- Demand developments are revolutionary
- Geopolitics favour gold
1. The US trade imbalances with the world are now reaching 7% of GDP and the US runs deficits with China, Japan, EU, Canada, etc. The US economy needs absolutely to absorb $4 billion per working day of foreign financed credit. As we have already stated the USD may need to drop 15-20% to help re-adjust these imbalances.
2. Meanwhile foreign USD reserves have exploded to $4.2 trillion – doubling since 2001 – and the asian Central Banks alone hold $2.2 trillion of it. China is adding approx. $20 billion per month. If the Asians were to diversify only a fraction of their USD reserves into gold they alone could purchase 20.000 tonnes.
3. Historically, gold remains cheap as it has now only just reached its 25 yr. average. Likewise, verses both oil prices and the S&P500 gold remains very undervalued.
4. Reflation is the act of debauching one's currency even further but that is the “easy” choice most governments will take – other options of tax rises, cutting of services and disenfranchising the public with massive cuts in social security benefits are not politically palatable hence the printing of more money may be their only option – this in fact devalues any past debt to the point it is simply pumped away via newer debt.
5. Esitimates indicate that even on a “friendly” scale mining supply should fall based on lag times of investment (due to prices). This means that for supplies to rise it must be advantageous for companies to invest yet any investment needs a period of 8 – 10 years for them to return gold supply to the markets. Hence increased demand drives prices drives investment. Ergo the demand side equation being higher would point to higher prices in the future as these lag times are still not yet fully through the lifecycle period.
6. Equally, demand the world over is rising – China, India, etc. Also, as we stated with regard to the silver ETF – marketing vehicles which make purchasing easier for the public drives demand. Many new instruments and foreign markets have now opened their doors to trading in gold
7. Finally, geopolitical concerns and fears are acting as a catalyst, and gold has -- and will be -- a safehaven in times of trouble.
In conclusion, Dr. Murenbeeld's probability weighted outcome is:
- a 45% weighting for the 2006 EOY price to be $600 and
- a 50% chance for 2006 EOY to be $728.
- the 5% scenario is not considered here.
The overall probability weighted then is $658 2006 EOY and $694 2007 EOY.