Where to for Gold?

Time for another update, with the latest surge above $1600 USD per ounce last night. As I mentioned briefly in my last update, where to for gold?

First a quick recap – here is the current price activity within the context of a major, long term bull market.

Gold in USD, monthly prices with trend channel and GFC Episode 1

And here we are today (using daily charts – note how the June highs were taken out last week, and the May 2 record high surpassed shortly thereafter):

Gold in USD daily candlestick chart, with 260 day moving average (grey line)

Note that this recent rally has not been caused by a decline in the US Dollar:

Gold (black) and USD Index (green) for the last 3 months - USD is rallying alongside gold

Depending on your point of view and timeline, the possible price targets for this latest run up in gold prices include:

Peter L. Brandt (a renowned commodity trader) has the short term price target at $1654 (based on the recent pattern)

Peter Brandts target based on pattern formation

If the current trend continues for the remainder of the calendar year, the medium term price target is $1700:

Gold in USD weekly prices extended to end of 2011

If you consider that history is repeating, than the target is more likely in the $2700 to $3500 range (using 500 as the nominal point for 2011, and 900 as the “terminal” point in 2012-13):

Gold in USD compared to other bubbles (note this is not semi-log)

Of course, what we are talking about here is the broad assumption that gold will inexorably continue its bull market, flittering from one economic and monetary crisis to the next, with no end game in sight.

Is this time different? Or will The Bernank pull a Volcker and raise rates above their negative real terms, or will the ECB try to contain inflation (or will it be contained by a great swithe of debt destruction?) There are known unknowns that traders and investors face going into the 10th year of this bull market – take care.

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  1. Gold will go to US5,000, at least, in my view. It will fall off a cliff eventually, however. I don’t this will be for a while though.
    The question is what will the US unit trade in relation to other currencies!
    I think it will be somewhat like the proverbial Italian Lira.

    • It will fall off a cliff eventually

      No way. Mining precious metals is going to become so expensive with the price of oil post Peak Oil, and so heavily taxed (AGW means that highly carbon intensive activities like mining are going to be early victims), that Au and Ag will never be cheap again. Now’s an historic opportunity to get in.

      • sure, its expensive to mine gold but that is not what is important. The real question is who needs gold?

        Gold is pretty useless material so why would somebody pay $5k for something with no real value?

        • I agree, I myself would find little value in Gold. There is enough extracted and sitting idly in vaults to be used for industrial purposes and blinging out gangsters for thousands of years.
          Contrary to poular belief Gold has been a very poor inflation hedge, it is a hedge when everyone is scared, a fear hedge.
          If Gold skyrockets then surely that means people have taken money out of the economy to hoard ‘useless’ gold? So there would be less money for entrepeneurs, businesses, less money spent in the wider economy? What i’m getting at is would this be bad enough for Governments to somehow intervene in the Gold market?

          • I agree, I myself would find little value in Gold.

            Mankind has found intense value in gold for 6,000 years, and banks are still hoarding it. You appear to have been mesmerised by the modern (post 1970) fiat currency experiment, complete with electronic trinkets. iPhones will do that to you.

            There is enough extracted and sitting idly in vaults to be used for industrial purposes and blinging out gangsters for thousands of years.

            It’s not sitting in vaults for either of those purposes. Obviously.

            Contrary to poular belief Gold has been a very poor inflation hedge, it is a hedge when everyone is scared, a fear hedge.

            It as an excellent inflation hedge in 1980, and I made out like a gangster back then with gold. You are ignorant of history. But yes, it does soar when people quake, and people are going to be quaking big time soon. Read The Long Emergency by Jim Kunstler.

      • That’s an interesting question john cage – gold, like other forms of money, is only as valuable as people are prepared to pay for it.

        Unlike the neoclassicals (who only classify things as assets – i.e it must have a yield, yet they consider residential property with zero real yield (after holding costs and require a tax advantage to work) as being an asset, and not the consumption item that it is), I confer a different valuation method to gold, and I think there is something close to a calculable intrinsic value available.

        Physical gold is not rare, but it is not plentiful or able to be increased in quantity quickly (takes over a year to increase the gold supply by 1%, and even then, most of that “increase” is literally lost).

        To extract this gold up until now (i.e from whence gold was used as money a few thousand years ago til 40 years ago), required human labor and effort – something that can be calculated. The actual element itself has only a few minor industrial uses (but very important ones nonetheless).

        Labor, material costs, etc can be factored into the intrinsic value (e.g most Aussie gold mines break even at about $700 USD per ounce from memory).

        This is separate to the monetary value, which like all currencies, fiat or not (even “true” gold standards of yesteryear) are only worth what people – the market – will pay for them.

      • yeh this time its different…were special this time around.
        nothing goes up forever and stays there, at some point the asset values have to coincide with supply/demand, not phony values propped up to save the bankrupts.

  2. I’m selling my gold and silver as soon as possible!

    What with the discovery of that new form of energy that makes oil unnecessary (you didn’t read about it yet?), and the revelation by climate scientists that anthropogenic global warming does not exist and climate will soon revert to normal, meaning no more ruined crops and food shortages, as well as the solution to the vast credit bubble that Messrs Bernanke and Geithner have announced (interest rates at 20%, harsh austerity, no bailouts), there is no longer a need to own precious metals.

  3. No one know where it will end, but there are a lot of moves as you’ve mentioned that would cause gold to drop. Given the history on gold price moves and the COMEX activities, it’s hard to predict. Also there are OTC, and other opaque trades you don’t see. Like where did BIS get it’s big haul this year?

    Why does the COMEX control the spot price when it accounts for 10-15% of physical delivery per year??? If anyone knows please tell me.

    My view is that gold will go up over time naturally.

    Here is an interesting gold story in the FT today:

  4. Here is an intereting article.

    Sell Your House and Buy Silver.


    And in particular the following comment.

    “Gary, gold holders with margin positions are trading paper, not physical gold. There isn’t enough gold in the world to cover the paper shorts. Or for the paper holders to redeem in physical (read the fine print). The paper shorts, are leveraged 100 paper ounces to every one physical ounce in existence. (CFTC hearings, Wash. D.C., March, 2010). The paper shorts are the same guys running the ETFs. Can you say “double cross the client?” Do you think ‘derivatives’ are only in the real estate market? Or the banking industry? Those who are selling real physical gold do so because that’s their business. You can bet they have a vault full at home that’s not for sale at today’s low prices. You ask ‘if gold was money….” Do you suppose that unless Benny B. printed it, it’s not money? The historical figure JP Morgan thought it was. Alan Greenspan thinks it is. 2.5 billion Chinese and Indians think it is. Central banks around the world are gobbling up all they can find. Why gold? Why not tons of rice, or barrels of oil, or baskets of seashells? Why is China dumping dollars and downgrading US debt while desperately trying to increase gold reserves? Banks and nations are not dumping gold — they are dumping each other’s paper. Gold is precious–it’s wealth– because it’s rare and cannot be printed with the clik of a mouse. Men toil and sweat and sometimes die to produce physical gold and silver, and that’s why it’s wealth. Can’t eat gold, you say? Can’t eat a dollar bill either. Gold pays no dividends, you say? Neither does a dollar until you risk it by giving it to someone else to hold for you. To everyone truly enamored with dollar bills, I suggest you begin collecting large stacks of the older, worn out bills. They are softer, more pliable, and make a better bathroom tissue than the newer, crisper bills, with less chance of paper cuts. I would love to see the margin calls require physical gold to settle. Would love to see the paper shorts require physical gold to settle. You’d see gold jump in price by thousands of dollars per hour, long, long into the night.”

    • Nod,

      Taking inflation into account especially in the US/UK and probably Europe fiat is going out the back door and it’s why many have piled into equities, and gold/silver ETF’s.

      One trader told how big investors, and he claims CB’s have brought gold ETF shares, and then sold them demanding physical delivery, and the CME link shows how you do that.

      If you look at the COMEX Warehouse ‘registered stocks’ for this year it’s dropped quite a bit, so there is , maybe, some truth to the story. I say maybe because I believe very little of what I read on gold/silver.

      I also maintain people who predict 10,000/oz etc. usually have a vested interest. I’d believe a conservative increase over time.


    • Hmmmm

      Mainstream pro-gold article?

      Thanks – I will be keeping this in the memory as part of my precious metals bubble watch (yes, I own a fair bit of physical precious metal, and do think it will bubble…)


  5. Depends on where your starting base is. Have heard gold price targets of b/w $1700 – $10,000 before it runs its course.

    Just remember, being in AUD holder, it will be a lot more correlated with gold than most other majors.

  6. What does that “Going Vertical” graph show if the base is 1980 ( ten years earlier), when gold last hit it’s ‘all-time’ high? Isn’t that a better place to study a trend from? ie: peaks-to-peak.

  7. ‘Logically’, gold prices should go up if the US debt ceiling is not raised. However, the damage caused by a US default may be so catastrophic that your the counter-party goes belly-up, the counter-party insurance goes belly-up, and the exchange itself goes belly-up as well.

  8. IMHO I believe that central banks will raise interest rates significantly to kill the Gold Bull.

    • There’s only one slight problem with that theory – what would happen to the private debt and public debt overhang that is currently just hanging in there on ZIRP?

      • +1

        Ben talked about it and then corrected himself a few days later in the last two weeks.

      • The last time interest rates were high businesses and mortgage holders that held to much debt at a floating rate were in serious trouble. I should imagine that some would default, others will eat baked beans on toast and *may* hold on.

        At the end of the day Central Banks will do everything in their power to maintain seigniorage. A Gold standard would be a serious blow to that power. Worse for them would be for people to shun their fiat altogether and just use Gold or a currency that is stable (NZD? Just jokes).

        Seriously though, Japan’s downturn is primarily due to their ZIRP. Japan was accused of being to slow to decrease their interest rates but as the US has demonstrated a quickly instigated ZIRP is no better.

        Let those with to unserviceable debt loads at neutral rates, let them default. Then those assets (business, real estate, equities) can be purchased by those that actually have money at a realistic price.

        Now I’m rambling. But FFS, why is our economy being run to benefit those that have been unwise with their money? Hell, been unwise with other peoples money and get bailed out with taxpayer money!

        • ASX3K,

          Your right on CB’s, and since Nixon in 1971 went off the gold standard they have had free reign with fiat currencies.

          CB’s still use gold in swaps, and leasing. The CB of CB’s (BIS) has increased it’s stash this year, so while Ben says gold is not money, the US constitution says different. It’s still used for equity by CB’s and the RBA has approx 90 tonnes on the balance sheet e.g.. So Ben IMO can have the view that gold is not money, but it is a financial asset as that works for me.

          Of late we’re seeing views by well respected economists that gold could be used in a SDR based currency. The G20 have discussed the topic in 2010 in Toronto, and again this year based on an IMF paper produced for that reason. Personally, I don’t think they will do it.

          The UK, Australia, SA sold most/alot their gold, and if you could see the minutes of the meetings then we might learn something. Our RBA rejected the Perth Mint advice when Costello sold 100 odd tonnes in 1996 I think, and look at the price differential now.

          Enough of that.

          A figure worth noting is that gold makes up about 1% of financial investments worldwide. It might be a bit more now, but it’s a small number.

          I don’t think gold is viewed well by the financial industry, but central banks are acquiring it now, and the WGC has reported CB buying this year.

          Like I said I don’t believe much that’s reported on gold as I’ve found reports lacking, conspiracy theories, dis-information, vested interests, and general lack of knowledge in this industry. You just can’t get a big picture of gold flow and parts of the industry thrive on that. If it was transparent then all the rubbish about it would disappear IMHO.

          From what I’ve seen of the ZIRP it’s pushed investors to equities, but how many to gold??

  9. Hey, Prince,

    If you’re still reading the comment of this article…

    Any chance you could make a habit for us (your faithful and wonderful readers ;)) to keep tabs on, and write on, whatever “significant” institutional movements in precious metals you come across?

    Sorry to sound so specific, and hopefully, not demanding, but I do (and i think you do, too) consider institutional movements a key part of tracking the progression of asset bubbles, even precious metals.


  10. MontagueCapulet

    Gold will go up until the current systemic crisis runs its course and faith in the US dollar is restored.

    Volker’s interest rate hammer in 1980 killed off inflationary expectations and restored faith in the system. I expect that something similar will end the gold bull market this time around.

    The catch is that back in 1980 debt was only 30% of GDP. So before you can pull a Volker you need to inflate away 70% of the existing debt supply, otherwise you will totally destroy the economy.

    Problem is, there really isn’t that much inflation at the moment in the USA, and the debt is growing faster than inflation. So they’ll just kick the can along the road until government debt gets to 200% of GDP, like Japan, sometime in the 2020s maybe, and only when the current deflationary forces have worked their way out of the economy will they be able to gets some 70s style inflation going and inflate the debt away enough to allow a Voklker style reset. By the time that happens it will be 2030.

    For gold to actually get to the bubble stage, there has to be a total loss of faith in the system on the part of a majority of people, and a desperate search for alternatives. I think we are still a decade away from that point.The bubble will not even start until after 2020.

    • On the contrary. Inflation has already begun. Its just that its now been destroyed by staticians.
      Energy prices are “not included” inflation. Obviously no one spends money on gas, petrol or electricity!!!

      Bubbles are good. You just need to know when to get on and get off.

  11. El Zorro Dorado

    Ah, the yellow metal. Comparing a single entity like gold ( not a commodity but really money) with phenomena bubbles like those of housing and technology seems a bit unfair and simplistic.. and sure enough it has given the wrong slant to the argument. Housing and technolgy comprise innumerable variables and expressions of product, value and location. The measures are generalised or index form as well. So I believe the comparison to purport that gold is moving into a bubble is a red-herring and counter-productive.Gold is moving cautiously upwards as befits a product gaining slow re-acceptance across the world ( as an investment and competitive store of wealth) and one which is still excluded from most funds and only recently overcoming the persistent psychology and spruiking that it needs a use ( yield) to be valuable. As The Prince said –its value is what people will pay; as the fundamentals of the fiat world decline and real interest rates become negative in much of the world, , those fundamentals for gold improve–and will continue to do so until Bernanke offers something from left field. Gold will correct occassionally as it marches slowly upwards; with fits and spurts as pychology changes. Supply factors do not make much difference to the gold price with daily trading on the london market alone very much larger than annual production. It is getting much harder to find in big splots and mining costs are rising but most producers here in Aussie would be making good profits as of now. Every dollar upwards goes straight to profit, but…and its a big but…companies have to replace their reserves, and this is tres difficult, and most $ and time expensive. Really, the price of gold should be 50-100% higher now to justify production /exploration /all the rigmarole for the majority of companies here.Look out soon for a POG correction as the US $ gets a new (short) lease of life in the face of escalating woes in europe, but this gold bull market will continue through to 2017-20 on current indicators and market parameters; and possibly has a comprehensively different role as part of some re-jig of the international monetary system in the face of the changing of the guard.

  12. If anyone is still following this thread:::

    First, the “gold as currency” question – may I quote Trader Dan 18 July: “By the way, gold notched a print above the 1,000 British Pound level today as well as scoring another all time record high when priced in Euro terms. Clearly, it is trading as a currency as that makes three record highs now in three various major currency terms all in the same day.”

    Second, the bullion markets seem to suffer major manipulations – massive shorts from very big players – check out http://harveyorgan.blogspot.com/

    So, altho bullion is a prospective replacement for wobbly fiat currencies, there is a huge resistance to it becoming same.

    Calling which way that battle will be resolved is a hell of a guess.