It is frustrating at times to see the attention focused on predictions for the price of gold. The more sensational and spectacular the price forecast, the greater the cacophony.
It is worth taking a look back at a few of these predictions to help put things in perspective.
HEADLINE: Gold Forecast $6000, And Gold Mining Analysis Through Visualisation 23Jan2012
Quote: “If the current gold bull market was to follow the timing and extent of the 70s bull market, the gold price would reach $6000 before 2014.”
Gold price on 23Jan2012: $1679.00 per oz.
Gold price on 14Mar2014: $1382.00 per oz.
Gold price on 31Dec2014: $1181.00 per oz.
How far off base can a price prediction be? Not only did gold not reach the target price, it went in the opposite direction – beginning that same month – and proceeded to decline by thirty percent over the next two years, ending at $1205.00 per ounce on December 31, 2013.
The problem is not the plausibility of $6000.00 gold. It is very plausible, and possible; maybe even likely. However, the prediction was specifically time oriented and horrendously misjudged in terms of direction and timing.
All that is excusable. Unless you are the proprietor of a subscription service and/or making investment recommendations to others, or dispensing trading advice.
HEADLINE: JPMorgan Forecasts Gold $1,800 By Mid 2013 01Feb2013
Quote:“JPMorgan Sees Gold At $1,800 By Mid 2013 As South Africa “In Crisis” And “Escalating Instability” In Middle East J.P. Morgan Chase & Co. said gold will rise to $1,800 an ounce by the middle of 2013, with the mining industry in South Africa “in crisis,” according to Bloomberg.“
The price of gold on the date the headline appeared was $1667.00 per ounce. Five months later on June 29, 2013, the price of gold was $1233.00 per ounce.
The call for $1800.00 gold was a ‘safe’ prediction. Only an eight percent increase from the existing (then) level of $1667.00 would have resulted in a gold price of $1800.00.
But, as in the previous example, the price went south with a vengeance; this time dropping twenty-six percent in five short months.
HEADLINE: Trump Win Signals $1,500 Gold… 10Nov2016
Quote: “A Trump US presidential victory signals US$1,500 an ounce for gold… in the intermediate term.”
Gold price on 10Nov2016: $1258.00 per oz.
Gold price on 31July2017: $1268.00 per oz.
Apparently gold did not see the ‘signal’ since its current price is nearly identical to its price on the day the prediction appeared in print just after the elections last November.
And what does the writer mean by “intermediate term”? The longer the time frame, the less value in the prediction. The projected dollar increase amounts to twenty percent. If it takes two years, that amounts to roughly ten percent annually. In that case – or if it takes longer than two years – is it worth the bold-face headline?
HEADLINE: Trump to Send Gold Price to $10,000 10Nov2016
Gold prices and dates are the same as in the above example. With gold right where it was ten months ago, when might we expect some progress towards that price objective?
The more outlandish price predictions usually center around a breakdown or collapse of the monetary system. The breakdown occurs as a result of complete repudiation of the U.S. dollar after decades of value depreciation. People simply refuse to accept and hold U.S. dollars in exchange for their offered goods and services.
Now suppose at that time you own gold. Would you sell it? At what price? For how many worthless U.S. dollars would you part with an ounce of gold?
If someone offered you one billion monopoly dollars for an ounce of gold today, would you take it? How about ten billion?
Okay, so what if we see a precipitous decline in the value of the U.S. dollar over the next several years? Lets say that decline amounts to a loss in purchasing power for the dollar of fifty percent from current levels. This would equate to a gold price of approximately $2500.00 per ounce, a doubling from current levels.
This is valid if gold and the U.S. dollar are at equilibrium currently (I think they are). In other words, the current price of gold at $1250/60 is an accurate reflection of the cumulative decline in the value of the U.S. dollar since 1913.
The fifty percent decline in the purchasing power of the U.S. dollar would be reflected in higher prices for other goods and services; a pattern which has become all too familiar over the past one hundred years.
If there is a functioning market, and assuming you sell some gold and take profits, how much more will it cost for whatever else you might decide to buy? Do you really think you will be able to buy other items of value at ‘discounted’ prices at that time?
Gold, in 1913, was $20.00 per ounce. Currently it is $1260.00 per ounce. That is an increase of more that sixty-fold. But it does not represent a profit. Because the general price level of goods and services today – generally speaking – is sixty times higher than it was in 1913.
There are times when you can profit from sharp moves in gold in short-term situations. Generally, these are just before major movements in its U.S dollar price that reflect a realization of the cumulative decline in purchasing power of the dollar. And, to a lesser extent, recognizing when the expectations of others take the gold price well beyond equilibrium vs. the U.S dollar.
In 1999/2000 gold hit price lows of $250-275.00 per ounce. Soon thereafter it embarked on a decade long run culminating in a peak price of close to $1900.00 per ounce in 2011.
After its peak in 2011, gold declined over the next five years to a low of just above $1000.00 per ounce. A short-lived rebound in early 2016 brought it back to near current levels ($1250-1350.00) where it has generally remained without breaking either up or down to any significant degree.
Where were all these ‘experts’ in 1999/2000 and what were they predicting then?
And since 2011/2012? They have been saying pretty much the same thing over and over again. Buy now! Buy more! Before it’s too late!
One day, it will be too late. But it is more a matter of financial survival now than ever before. The obsession with profits, predicting and trading has obscured the real fundamentals.
And one way or another, most people’s profits are likely to go up in smoke before they do anything meaningful with them.
Gold – physical gold – is real money. It is real money because it is a store of value. And its value is constant. The U.S. dollar’s value continues to decline over time. The constantly declining value of the U.S. dollar and people’s perception of it, as well as their expectations for it, determine the price of gold.
Inflation is an insidious threat to our financial and economic security. It has been foisted upon us to the point that we are in danger of losing much more than the value of our money. The capital markets are facing risks of immensely greater proportion than those of 2008-09. Economic activity is primarily financed by credit and we are hooked on the drug of money and higher prices – for everything. We are told often that inflation is spontaneous and that we must learn to mange its effects. That is not true.
Inflation is intentional and practiced by governments and central banks the world over. And its effects are unpredictable and destructive. In addition, the effects of inflation are cumulative; hence, they tend to be more volatile, ongoing. And buried underneath all of the surface weaknesses is the specter of fractional-reserve banking. It is the legalized version of Ponzi scheme.