Gold Price Forecast: Market-Long-Wave Analysis 2009-2012 49 comments
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Apparently gold is "hard to value" since it doesn't have a cash flow. (Well, actually, until you decide to sell it has a negative cash flow because you have to keep it in vaults or nasty people are disposed to steal it.)
Valuation 101
I was taught to do valuations three way.
- The Market Value (how much you can sell it for today - commonly and sometimes incorrectly referred to as the "price").
- Income Capitalization (an Other-Than-Market Value under International Valuation Standards (IVS)), which is the net present value of future cash flows, complicated by the fact that you get into a debate about (a) what discount rate to use and (b) what the terminal value is (that's when you sell it in ten or twenty years time).
- Depreciated Replacement Cost, which is broadly the cost of buying a gold mine, and digging it out of the ground, which is slightly complicated by the current market price (affects how much you can buy gold mines for), and the fact that "effective life" of gold is infinite.
The other thing about valuation is that if the Market Value (the price), the value from income capitalization, and the value from the depreciated replacement cost are not exactly the same, then by definition, either (a) you've got your sums wrong or (b) the market is in what IVS calls "disequilibrium", and if that's the case you can expect change.
Gold is an Asset
This is the thing, gold is an asset, and like any asset there are two components to value, there is the cash flow you can expect it to generate plus the prospect of selling it for some guess of a price in the future.
Pretty much like an owner-occupied house, you can often not get worthwhile rent, yet some people pay to keep their second or third homes going even if they hardly live in them because there is an expectation they will be worth more in the future. This isn't very different from gold, and the similarity doesn't end there. Some people buy gold so they can hang it around their necks from time to time to impress lesser mortals over how rich they are. Some people buy big houses for exactly the same reason.
So presumably there might be a correlation between the "disequilibrium" of the US housing market and the price of gold?
What a surprise, it looks like there is!!
This chart compares the average price of gold over a year and a calculation of the disequilibrium of the market for housing in USA.
Looks like once people started to fully appreciate the "value" of gold in about 1980, it has roughly tracked the extent of over or under valuation of housing, which logically makes some sort of sense, except there appears to be a two year lag or so.
In this case, perhaps by about mid-2012, gold might be worth about $200 an ounce. That's a sort of deflation scenario rather than an inflation scenario (the line was "eyeballed" and the projection for the future for house prices is explained here.)
How reliable is that projection?
The plot of housing price over/under value lagged two years compared to the price of gold from 1980 to 2008 (28 years) gives a 78% R-Squared. Ok, that's not 95% and it's not exactly a long time-series, but at least the projection is within the range of the correlation.
Interesting, might be worth having another look at that in ten years time.
Disclosure: No Positions
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Of course all this deflation talk is pure nonsense! Base money supply is shooting through the roof! Fed, Bank of England, Bank of Japan - all of them pushing QE policy! OH MY GOD OF COURSE THERE IS HYPERINFLATION! They're just manipulating everything! Like the price of gold! And all that deflationary nonsense is well, just nonsense! We can brush it off like that!
Japan wholesale prices log fastest drop since 2002
news.yahoo.com/s/afp/2...
German wholesale prices see record decline in 22 years
news.xinhuanet.com/eng...
Deflation returns to Britain for first time since 1960
www.guardian.co.uk/bus...
US CPI In First Year-Over-Year Decline Since 1955
www.bls.gov/news.relea...
Chinese CPI, PPI Negative
graphics.thomsonreuter...
US PPI Biggest Drop In 59 Years
www.bls.gov/news.relea...
Just 5 more words, bear with me -
Sheep mentality inside hyperinflated brains
It's just so typical of America to think the world revolves around $300m people.
Indeed there are a lot of things wrong or not considered with this analysis, the price of oil is important (on reflection from a comment I got here probably because it affects the marginal cost of production), fear of inflation is also an issue, as is what governments decide to do.
I just wonder if a period of deflation precipitated by a housing crash, might push the price down, if inflation or fear of inflation sends it up then deflation should send it down...shouldn't it?
On Apr 23 05:16 AM rick12345 wrote:
> MMmm interesting.... One question though. Why is there an inverse
> relationship between 1987 and 2000. According to your theory and
> graph the price of gold should have crashed in 1992. two years after
> the housing bubble popped, in 1990. Why oh why, I ask then, did gold
> rise??? I wonder if there is also a correlation between the Gulf
> war (circa 1990)and the price of gold?
> It's just so typical of America to think the world revolves around
> $300m people.
It seems to me like the "new economic reality" is that things could well cost less tomorrow than they cost today, which turns the whole business model of the past 20 years on it's head, and it means it makes little sense to borrow money to do anything more than to buy something you need now but can't afford until tomorrow, gearing up to make money out of inflation, which in any case adds no economic value, might be a thing of the past.
If that happens then presumably gold could cost less? Everyone says gold is a hedge against inflation, that means cash is a good hedge against deflation - doesn't it?
On Apr 23 04:04 AM Jesusonair wrote:
> "Perhaps there is deflation out there but mostly I just see readjustments
> to new economic realities"
>
> Of course all this deflation talk is pure nonsense! Base money supply
> is shooting through the roof! Fed, Bank of England, Bank of Japan
> - all of them pushing QE policy! OH MY GOD OF COURSE THERE IS HYPERINFLATION!
> They're just manipulating everything! Like the price of gold! And
> all that deflationary nonsense is well, just nonsense! We can brush
> it off like that!
>
> Japan wholesale prices log fastest drop since 2002
> news.yahoo.com/s/afp/2...
>
>
> German wholesale prices see record decline in 22 years
> news.xinhuanet.com/eng...
>
>
> Deflation returns to Britain for first time since 1960
> www.guardian.co.uk/bus...
>
>
> US CPI In First Year-Over-Year Decline Since 1955
> www.bls.gov/news.relea...
>
> Chinese CPI, PPI Negative
> graphics.thomsonreuter...
>
> US PPI Biggest Drop In 59 Years
> www.bls.gov/news.relea...
>
> Just 5 more words, bear with me -
> Sheep mentality inside hyperinflated brains
Presumably though if that "work" is going to be charged out at less $$ tomorrow than it was today, then gold today would be worth less in $$ today that if that work would have cost more tomorrow in $$ than today.
On Apr 23 01:47 AM Boxed Merlot wrote:
> You state gold is hard to value due to it's lack of cash flow and
> go on to attempt to define it's "value" by applying 3 principles
> from "Valuation 101", i.e. Market Value, Income Capitalization and
> Depreciated Replacement Cost. While I sympathize with your plight
> at trying to apply commodity thinking to this material, the fact
> remains that history has always treated ag / au and other lesser
> "precious" metals more as currency for use in bartering, "all debts,
> public and private". It's proved more helpful for me to believe
> as I was taught early on that an oz of ag and au in US terms is roughly
> equivilent to an hour and a week of "labor" respectively. When these
> two ratios are in the 40:1 range, time to trade ag for au. Likewise,
> when ratios get to the 65-75:1 as they have been lately, time to
> trade au for ag. As for "cash flow", what you gain is pent up future
> services of blue and white collar energy for commerce to continue.
> I know it can be a bit weird to think of it this way, but the constitution
> originally only allowed congress to "coin" money because it was the
> best way to prevent future generations from buying the votes / approval
> of an adoring public. (Guess they found a way to circumvent that
> little problem.) Besides, as long as the USD remains the primary
> currency, anyone that uses it has to "render unto Ceasar" that which
> is rightfully theirs / ours. I'm still curious to see how this whole
> thing will continue to play out.
>
>
>
> Apparently gold is "hard to value" since it doesn't have a cash flow.
> (Well, actually, until you decide to sell it has a negative cash
> flow because you have to keep it in vaults or nasty people are disposed
> to steal it.)
>
>
> Valuation 101
>
>
> I was taught to do valuations three way.
>
> The Market Value (how much you can sell it for today - commonly and
> sometimes incorrectly referred to as the "price").
> Income Capitalization (an Other-Than-Market Value under International
> Valuation Standards (seekingalpha.com/symbo...)), which
> is the net present value of future cash flows, complicated by the
> fact that you get into a debate about (a) what discount rate to use
> and (b) what the terminal value is (that's when you sell it in ten
> or twenty years time).
> Depreciated Replacement Cost, which is broadly the cost of buying
> a gold mine, and digging it out of the ground, which is slightly
> complicated by the current market price (affects how much you can
> buy gold mines for), and the fact that "effective life" of gold is
> infinite.
The plug has been pulled out and central banks are trying to keep the bath full by pouring water.
imho, there has got to happen something RADICAL, like QE on the scale of hundreds of trillions $ + money given out to consumers directly and mortgage debts totally forgiven in order to make a U-turn here and start seeing some inflation in prices (apart from food ones ofc). I don't see how Obama or any other administration in the developed countries can reset the system. Deflationary shock continues rippling through the world economy.
On Apr 23 06:15 AM Andrew Butter wrote:
> Base money supply has gone through the roof sure, but the velocity
> has dropped through the floor.
>
> It seems to me like the "new economic reality" is that things could
> well cost less tomorrow than they cost today, which turns the whole
> business model of the past 20 years on it's head, and it means it
> makes little sense to borrow money to do anything more than to buy
> something you need now but can't afford until tomorrow, gearing up
> to make money out of inflation, which in any case adds no economic
> value, might be a thing of the past.
>
> If that happens then presumably gold could cost less? Everyone says
> gold is a hedge against inflation, that means cash is a good hedge
> against deflation - doesn't it?
For a good model of the fair price of gold, see Paul Van Eeden's website:
www.paulvaneeden.com/Gold
It's based on a very sensible definition called the "Actual Money Supply":
www.paulvaneeden.com/T...
On Apr 22 11:29 AM Zoltan L. Kovacs wrote:
> There is (at least) one missing variable: production costs for gold.
> This and the gold price determine the price for the mines and not
> the other way round.
Dr. Lacy Hunt makes a very good case for years of deflation.
www.investorsinsight.c...
The US govt is set to spend trillions a year on "stimulus". Japan shows that it won't work (read the link above). Bernanke has made clear the US Fed will print enough money to get us back to 3-4% inflation. Conservative estimates are that this will require $2 trillion. At some point, it will start to "work", inflation will pick up but the economy will not. We'll move from stag deflation to stag inflation.
The last time we had stag deflation, in the 1970s, gold went through the roof.
Moreover, analysis by Chris Gibson of Edison Investment shows that the setup in gold leasing and hedging markets is also the same as it was in the 70s, with negative real interest rates causing a short squeeze on the bullion banks.
www.gata.org/node/7372
On Apr 23 04:04 AM Jesusonair wrote:
> Of course all this deflation talk is pure nonsense! ...
> Sheep mentality inside hyperinflated brains
For instance, in comparison, if todays ~ $900 gold goes down to $200, then (an already reduced home price) a $900,000 home now will be selling for $200,000 two years from now.
That's just ridiculous!
But perhaps not this one?
I wonder whether you noticed that the housing line is the extent of miss-pricing of the housing market - it's not the price.
The point of the article is perhaps (a) gold can also be miss-priced just like housing (b) whatever it is that causes miss pricing of housing could quite possibly cause a miss-pricing of gold.
I offer no explanation for why apart from reflecting on the utility value of gold which is some respects is similar to the utility value of a house (and in some respects is not), and also that in the long term prices tend to or oscillate around the long term utility value.
You might say that gold has no utility function it does, as jewelry and as much more as something to save until a rainy day.
I never meant to imply a dependency relationship between gold and housing.
In two years time if the deflation that some people fear kicks in the house that was worth $900,000 will very likely be worth about that having gone down perhaps to $800,000 on the way. That's another story, totally independent of gold.
But if there is deflation instead of inflation - won't gold go down from where it is, and if it is severe won't it go down a lot?
OK - perhaps there won't be deflation, but history suggests that after massive miss-pricing of assets, what typically happens down the road (might explain the two year lag) is deflation.
On Apr 23 10:07 PM Mayascribe wrote:
> Honestly, this is one of the most absurd articles I've yet to read
> on SA.
>
> For instance, in comparison, if todays ~ $900 gold goes down to $200,
> then (an already reduced home price) a $900,000 home now will be
> selling for $200,000 two years from now.
>
> That's just ridiculous!
>
>
My elbows are correlated 2 to 1 to my ass but I am not sure what that means either.
Where I was coming from is if assets can get miss priced maybe gold can too.
On Apr 27 02:55 AM Tranquilmeditation wrote:
> "So presumably there might be a correlation between the "disequilibrium"
> of the US housing market and the price of gold?"
>
> My elbows are correlated 2 to 1 to my ass but I am not sure what
> that means either.
Personally I think (a) it's deflation coming (b) that's going to send gold down, but that's just gut feeling, and I have been known to be wrong before (sadly quite frequently).
Anyway the debate is an eye-opener.
On Apr 23 10:35 AM tjhorton wrote:
> There is such a thing as "good" deflation, where prices fall due
> to technology and productivity and open markets etc. We are in "bad"
> deflation, a financial crisis caused by unwinding debt at high levels.
> At 400% debt/GDP and a global banking solvency crisis, we're in the
> bad type.
>
> Dr. Lacy Hunt makes a very good case for years of deflation.
> www.investorsinsight.c...
>
>
> The US govt is set to spend trillions a year on "stimulus". Japan
> shows that it won't work (read the link above). Bernanke has made
> clear the US Fed will print enough money to get us back to 3-4% inflation.
> Conservative estimates are that this will require $2 trillion. At
> some point, it will start to "work", inflation will pick up but the
> economy will not. We'll move from stag deflation to stag inflation.
>
>
> The last time we had stag deflation, in the 1970s, gold went through
> the roof.
>
> Moreover, analysis by Chris Gibson of Edison Investment shows that
> the setup in gold leasing and hedging markets is also the same as
> it was in the 70s, with negative real interest rates causing a short
> squeeze on the bullion banks.
> www.gata.org/node/7372
>
> On Apr 23 04:04 AM Jesusonair wrote:
On Apr 27 02:55 AM Tranquilmeditation wrote:
> "So presumably there might be a correlation between the "disequilibrium"
> of the US housing market and the price of gold?"
>
> My elbows are correlated 2 to 1 to my ass but I am not sure what
> that means either.
On Apr 22 12:06 PM Freya wrote:
> Mr. Butler: please tell me why I would not be able to substitute
> Oil for Gold in the above graph and get a similar correlation?<br/>
>
> Making a call on Dubai Real Estate? Many people made the same call
> earlier than Mid-2008(another author, J. Kingsdale because he could
> not see how a non oil producer could possibly continue the torrid
> pace)
>
> Newmont Mining... production costs were around $400 last I saw, yes,
> perhaps you were wrong.
>
> There was no hostility, but now there is suspicion since you seem
> to sense hostility.