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Albert Sung is the author of the Katchum Macro-Economic Blog, monitoring breaking economic news from a day to day basis. He started investing in 2008 because of the economic crisis and holds a masters degree in chemical engineering. Previously, he worked several years as a process engineer at... More
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  • Calculating The Upside In Gold And Palladium 1 comment
    Mar 6, 2014 12:18 PM | about stocks: GLD

    Sometimes it is interesting to be able to estimate the price increase in something, for example palladium or gold. We do that via supply and demand analysis.

    Let's say that supply stays the same, because mines aren't going to suddenly increase their supply. Then we look only at the demand side. Because demand can go up and down very fast due to price fluctuations. If the gold price were to double, you could only buy half of the gold with the same money.

    1) The case of palladium:

    Currently we have a deficit of 1 million ounces of palladium per annum. This means that demand is 1 million ounces higher than supply. Currently the total demand of palladium is 8 million ounces and supply is 7 million ounces.

    So if supply stays the same and we want to close the deficit gap, then we need to increase the price of palladium so much that demand will drop to 7 million ounces. That's a 1/8 = 12.5% decrease in demand.

    There is a simple formula to calculate the price rise needed to decrease the demand by a certain percentage:

    price rise = (100/(1-Demand decrease)) - 100


    price rise = (100/(1-12.5%)) - 100 =14.3%

    So if the palladium price rises 14.3%, then demand will fall 12.5%. That will close the deficit gap.

    Investors can then sell their profits when the palladium price has risen 14.3%.

    2) The case of gold:

    Let's do the same for gold. We have supply and demand numbers here.

    Supply = 3936 tonnes/annum

    Demand = 5670 tonnes/annum

    Deficit = 5670-3936 = 1734 tonnes/annum

    Demand will have to decrease 1734/5670 = 30% to close the deficit gap.

    If we want to close the deficit gap, the price of gold at a constant supply needs to rise:

    price rise = (100/(1-30%)) - 100 = 43%

    So gold needs to go from $1300/ounce to $1300*(1.43) = $1859/ounce to close the current deficit gap.

    So there is your gold price target: $1859/ounce.

    Tell me what you think, is this a realistic estimate?

    Stocks: GLD
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  • BigBearShort
    , contributor
    Comments (44) | Send Message
    My own observation is that the gold price was around $1700/oz when the EFTs were demand/supply neutral (e.g. nor net seller or net buyers). Considering this was in 2012, that base demand is driven by China and India (and average $$ wages in the former have increased with 15% annually) this should, adjusted to today's numbers, yield a new price equilibrium which is closer to your estimate.


    I posted a question on your blog earlier today, as to why Belgium is popping up on treasury stats as the buyer of China's US treasuries.


    In this context, I allow myself to pose a leading question: Do you think this is ECB trying to keep the EUR/USD stable, in spite of not having a currency stabilitzation mandate, to prevent US treasuries (and the dollar) from collapsing, now that China needs reduce its central bank reserves in order to sterilize a growing current account deficit?
    18 Mar 2014, 08:43 AM Reply Like
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