Many investors, especially those new to precious metals, don’t know that gold is seasonal. For a variety of reasons, notably including the wedding season in India, the price of gold fluctuates in fairly consistent ways over the course of the year.
This pattern is borne out by decades of data, and hence has obvious implications for gold investors.
Can you guess which is the best month for buying gold?
When I first entertained this question, I guessed June, thinking it would be a summer month when the price would be at its weakest. Finding I was wrong, I immediately guessed July. Wrong again, I was sure it would be August. Nope.
Cutting to the chase, here are gold’s average monthly gain and loss figures, based on almost 40 years of data:
Since 1975—the first year gold ownership in the US was made legal again—March has been, on average, the worst-performing month for gold.
This, of course, makes March the best month for buying gold.
But: averages across such long time frames can mask all sorts of variations in the overall pattern. For instance, the price of gold behaves differently in bull markets, bear markets, flat markets… and manias.
So I took a look at the monthly averages during each of those market conditions. Here’s what I found.
The only month gold has been down in every market condition is March.
Combined with the fact that gold soared 10.2% the first two months of this year, the odds favor a pullback this month.
And as above, that can be a very good thing. Here’s what buying in March has meant to past investors. We measured how well gold performed by December in each period if you bought during the weak month of March.
Only the bear market from 1981 to 2000 provided a negligible (but still positive) return by year’s end for investors who bought in March. All other periods put gold holders nicely in the black by New Year’s Eve.
If you’re currently bullish on precious metals, you might want to consider what the data say gold bought this month will be worth by year’s end.
Regardless of whether gold follows the monthly trend in March, the point is to buy during the next downdraft, whenever it occurs, for maximum profit. And keep your eye on the big picture: gold’s fundamentals signal the price has a long climb yet ahead.
Everyone should own gold bullion as a hedge against inflation and other economic maladjustments… and gold stocks for speculation and leveraged gains.
The greatest gains, of course, come from the most volatile stocks on earth, the junior mining sector. Following our recent Upturn Millionaires video event with eight top resource experts and investment pros, my colleague Louis James released his 10-Bagger List for 2014—a timely special report on the nine stocks most likely to gain 1,000% or more this year. Click here to find out more.
We observed earlier this week that Platinum and Palladium Have Broken Out from a year old trading range. Interestingly, the breakout has gone rather unnoticed. Sporadically, we have seen commentaries about the breakout. From an investing point of view, we consider this as very positive, as momentum buyers are not entering the market (yet).
One of the few commentaries this week came from Frank Holmes, who detected two global events affecting the palladium and platinum market. He believes that “the situation in Ukraine and Russia along with six-week-long strikes in South Africa began raising concerns that these palladium-rich countries may not be able to continue supplying the commodity at normal levels. Currently South Africa supplies around 37 percent of the world’s palladium; Russia supplies close to 40 percent of the world’s palladium.”
You can see the effect the political landscape is having on palladium. Over the past year, the metal has mainly traded sideways, but this week hit its highest level in almost a year. The precious metal reached $775 per ounce while its sister, platinum, climbed to nearly $1,500 an ounce.
Just this week, the U.S. Mint is “ending a four-year exit from the market” by selling one-ounce American Eagle platinum bullion coins, writes Frank Tang from Reuters. According to a wholesaler this week, initial demand is strong, as 1,000 coins have already been scooped up.
Like I discussed with Resource Investing News at the Vancouver Resource Investment Conference, industrial demand has been gaining strength. Take rising automobile sales in the U.S. that I talked about a few months ago. With interest rates on car loans so low, Americans have been replacing their clunkers with more fuel efficient cars, which is positive for platinum and palladium.
It’s a similar story in emerging markets. In Africa, the GDP without a leveraged economy is still growing at 5 percent, and you definitely need platinum and palladium for their vehicles, even if they are diesel.
In China, vehicle sales last year rose faster than expected, climbing nearly 14 percent compared to a year earlier, according to the China Association of Automobile Manufacturers. The country is already the biggest automobile market in the world and millions of new cars on the roads add up fast.
Furthemore, we have found an extremely interesting chart on Marketwatch. In Palladium Is The Metal To Own, the author compares the price evolution of the four precious metals. One common perception is that all precious metals move simultaneously. That is not true, as palladium and platinum have dynamics which differ from the ones of gold and silver, although that is not always reflected in the price evolution.
The chart shows how gold and silver were smashed down in the last 12 months while palladium has held up very well. Palladium looks extremely compelling.
The above chart also reveals that palladium’s fundamentals and its price are nicely aligning.
As a general rule of thumb, we all know that fundamentals are not always reflected in the charts. It mostly takes some time until the price follows fundamentals. For palladium in particular, there is a very high probability that its chart starts reflecting the strong supply/demand fundamentals. It this trend continues, then we are in for very interesting times, at least for investors who had the courage to get in at this price point.
Now that it appears clear the bottom is in for gold, it’s time to stop fretting about how low prices will drop and how long the correction will last—and start looking at how high they’ll go and when they’ll get there.
When viewing the gold market from a historical perspective, one thing that’s clear is that the junior mining stocks tend to fluctuate between extreme boom and bust cycles. As a group, they’ll double in price, then crash by 75%… then double or triple or even quadruple again, only to crash 90%. Boom, bust, repeat.
Given that we just completed a major bust cycle—and not just any bust cycle, but one of the harshest on record, according to many veteran insiders—the setup for a major rally in gold stocks is right in front of us.
This may sound sensationalistic, but based on past historical patterns and where we think gold prices are headed, the odds are high that, on average, gold producers will trade in the $200 per share range before the next cycle is over. With most of them currently trading between $20 and $40, the returns could be stupendous. And the percentage returns of the typical junior will be greater by an order of magnitude, providing life-changing gains to smart investors.
What you’re about to see are historical returns of both producers and juniors during three separate boom cycles. These are factual returns; they are not hypothetical. And if you accept the fact that this market moves in cycles, you know it’s about to happen again.
Gold had a spectacular climb in 1979-1980, and gold stocks in general gave a staggering performance at that time—many of them becoming 10-baggers (1,000% gains and more). While this is a well-known fact, few researchers have bothered to identify exact returns from specific companies during this era.
Digging up hard data from before the mid-1980s, especially for the junior explorers, is difficult because the information wasn’t computerized at the time. So I sent my nephew Grant to the library to view the Wall Street Journal on microfiche. We also include information we’ve had from Scott Hunter of Haywood Securities; Larry Page, then-president of the Manex Resource Group; and the dusty archives at the Northern Miner.
Note: This means our tables, while accurate, are not at all comprehensive.
Let’s get started…
The Quintessential Bull Market: 1979-1980
The granddaddy of gold bull cycles occurred during the 1970s, culminating in an unabashed mania in 1979 and 1980. Gold peaked at $850 an ounce on January 21, 1980, a rise of 276% from the beginning of 1979. (Yes, the price of gold on the last trading day of 1978 was a mere $226 an ounce.)
Here’s a sampling of gold producer stock prices from this era. What you’ll notice in addition to the amazing returns is that gold stocks didn’t peak until nine months after gold did.
Returns of Producers in 1979-1980 Mania
Price on 12/29/1978
Sept. 1980 Peak
Campbell Lake Mines
Giant Yellowknife Mines
Today, GDX is selling for $26.05 (as of February 26, 2014); if it mimicked the average 289.5% return, the price would reach $101.46.
Keep in mind, though, that our data measures the exact top of each company’s price. Most investors, of course, don’t sell at the very peak. If we were to able to grab, say, 80% of the climb, that’s still a return of 231.6%.
Here’s a sampling of how some successful junior gold stocks performed in the same period, along with the month each of them peaked.
Returns of Juniors in 1979-1980 Mania
Price on 12/29/1978
Date of Peak
Mosquito Creek Gold
Eagle River Mines
Meston Lake Resources
If you had bought a reasonably diversified portfolio of top-performing gold juniors prior to 1979, your initial investment could have grown 23 times in just two years. If you had managed to grab 80% of that move, your gains would still have been over 1,850%.
This means a junior priced at $0.50 today that captured the average gain from this boom would sell for $12 at the top, or $9.75 at 80%. If you own ten juniors, imagine just one of them matching Copper Lake’s better than 100-bagger performance.
Here’s what returns of this magnitude could mean to you. Let’s say your portfolio includes $10,000 in gold juniors that yield spectacular gains such as the above. If the next boom cycle matches the 1979-1980 pattern, your portfolio could be worth $241,370 at its peak… or about $195,000 if you exit at 80% of the top prices.
Note that this does require that you sell to realize your profits. If you don’t take the money and run at some point, you may end up with little more than tears to fill an empty beer mug. In the subsequent bust cycle, many junior gold stocks, including some in the above list, dried up and blew away. Investors who held on to the bitter end not only saw all their gains evaporate, but lost their entire investments.
You have to play the cycle.
Returns from that era have been written about before, so I can hear some investors saying, “Yeah, but that only happened once.”
Au contraire. Read on…
The Hemlo Rally of 1981-1983
Many investors don’t know that there have been several bull cycles in gold and gold stocks since the 1979-1980 period.
Ironically, gold was flat during the two years of the Hemlo rally. But something else ignited a bull market. Discovery. Here’s how it happened…
Back in the day, most exploration was done by teams from the major producers. But because of lagging gold prices and the resulting need to cut overhead, they began to slash their exploration budgets, unleashing a swarm of experienced geologists armed with the knowledge of high-potential mineral targets they’d explored while working for the majors. Many formed their own companies and went after these targets.
This led to a series of spectacular discoveries, the first of which occurred in mid-1982, when Golden Sceptre and Goliath Gold discovered the Golden Giant deposit in the Hemlo area of eastern Canada. Gold prices rallied that summer, setting off a mini bull market that lasted until the following May. The public got involved, and as you can see, the results were impressive for such a short period of time.
Returns of Producers Related to Hemlo Rally of 1981-1983
Date of High
Campbell Red Lake
Teck Corp Class B
Gold producers, on average, returned over 70% on investors’ money during this period. While these aren’t the same spectacular gains from just a few years earlier, keep in mind they occurred over only about 12 months’ time. This would be akin to a $20 gold stock soaring to $34.50 by this time next year, just because it’s located in a significant discovery area.
Once again, it was the juniors that brought the dazzling returns.
Returns of Juniors Related to Hemlo Rally of 1981-1983
Date of High
The average return for these junior gold stocks that had a direct interest in the Hemlo area exceeded a whopping 4,000%.
This is especially impressive when you realize that it occurred without the gold stock industry as a whole participating. This tells us that a big discovery can lead to enormous gains, even if the industry as a whole is flat.
In other words, we have historical precedence that humongous returns are possible without a mania, by owning stocks with direct exposure to a discovery area. There are numerous examples of this in the past ten years, as any longtime reader of the International Speculator can attest.
By May 1983, roughly a year after it started, gold prices started back down again, spelling the end of that cycle—another reminder that one must sell to realize a profit.
The Roaring ’90s
By the time the ’90s rolled around, many junior exploration companies had acquired the “intellectual capital” they needed from the majors. Another series of gold discoveries in the mid-1990s set off one of the most stunning bull markets in the current generation.
Companies with big discoveries included Diamet, Diamond Fields, and Arequipa. This was also the time of the famous Bre-X scandal, a company that appeared to have made a stupendous discovery, but that was later found to have been “salting” its drill data (cheating).
By the summer of ’96, these discoveries had sparked another bull cycle, and companies with little more than a few drill holes were selling for $20 a share.
The table below, which includes some of the better-known names of the day, is worth the proverbial thousand words. The average producer more than tripled investors’ money during this period. Once again, these gains occurred in a relatively short period of time, in this case inside of two years.
Returns of Producers in Mid-1990s Bull Market
Pre-Bull Market Price
Date of High
Here’s how some of the juniors performed. And if you’re the kind of investor with the courage to buy low and the discipline to sell during a frenzy, it can be worth a million dollars. Hold on to your hat.
Returns of Juniors in Mid-1990s Bull Market
Pre-Bull Market Price
Date of High
Many analysts refer to the 1970s bull market as the granddaddy of them all—and to a certain extent it was—but you’ll notice that the average return of these stocks during the late ’90s bull exceeds what the juniors did in the 1979-1980 boom.
This is akin to that $0.50 junior stock today reaching $19.86… or $16, if you snag 80% of the move. A $10,000 portfolio with similar returns would grow to over $397,000 (or over $319,000 on 80%).
Gold Stocks and Depression
Those of you in the deflation camp may dismiss all this because you’re convinced the Great Deflation is ahead. Fair enough. But you’d be wrong to assume gold stocks can’t do well in that environment.
Take a look at the returns of the two largest producers in the US and Canada, respectively, during the Great Depression of the 1930s, a period that saw significant price deflation.
Returns of Producers During the Great Depression
During a period of soup lines, crashing stock markets, and a fixed gold price, large gold producers handed investors five and six times their money in four years. If deflation “wins,” we still think gold equity investors can, too.
How to Capitalize on This Cycle
History shows that precious metals stocks move in cycles. We’ve now completed a major bust cycle and, we believe, are on the cusp of a tremendous boom. The only way to make the kind of money outlined above is to buy before the boom is in full swing. That’s now. For most readers, this is literally a once-in-a-lifetime opportunity.
As you can see above, there can be great variation among the returns of the companies. That’s why, even if you believe we’re destined for an “all-boats-rise” scenario, you still want to own the better companies.
My colleague Louis James, Casey’s chief metals and mining investment strategist, has identified the nine junior mining stocks that are most likely to become 10-baggers this year in their special report, the 10-Bagger List for 2014. Read more here.
Gold’s big news story of 2013 was undoubtedly the price drop, followed by the huge gold ETF outflows.
It seems that the tide is turning now, both for the gold price and the ETF gold holdings. There is a good reason to believe that the new appetite for gold ETF’s is fundamentally much more important than a rising gold price. This article makes the case for that.
After the steep gold price drop in April 2013, we discussed the mass exodus of gold holdings in the GLD ETF (see this article):
GLD holdings in the first week of January 2013: 43,149,400.96 ounces [1342,96 tonnes]
In addition, we wrote in the same article: “The difference of 10 million ounces of physical gold represents 302 tonnes. To put that figure into perspective, it is 30 times larger than the gold holdings of Cyprus; it would be the 18th largest gold holding in the world, comparable with the ones of Saudi Arabia and the UK.”
Fast forward to 2014, where do we stand with the gold holdings in the GLD ETF? According to this Mineweb article, the GLD ETF gold holdings were 793.16 tonnes on Jan 31st 2014 and they increased to 803.7 tonnes on Feb 27th 2014. The author adds to it: “Between the beginning of January 2013 and the beginning of February 2014, this single ETF had shed a massive 557 tonnes of gold as investors deserted it in droves, supposedly in favour of the seemingly ever rising general equity markets.”
The blue line on the following chart represents the GLD gold holdings (chart courtesy Sharelynx, the most comprehensive gold chart center on the internet).
Why is the break of this downtrend so important? The key lies in this question we asked in the same article we wrote a year ago:
The point is not the sale of the gold … The key question is who has been buying these gigantic amounts of physical gold? The gold is not being consumed, so it is in some hands right now. Which ones? We asked the question a couple of weeks ago, but it seems no clear answer exists at this point.
We have the answer to that question meantime.
The mainstream media has focused wrongly on the gold outflows. That made up for interesting headlines, but it was not the most relevant part of the story. The most crucial point was related to the buying. It is clear, meantime, that the physical gold has been flowing to Asia (primarily China) through Switzerland (where refiners have been working overtime since May 2013, melting down the large wholesale bars into smaller pieces for smaller investors and retailers in China).
All this implies that the gold that exited the ETF’s is in strong hands now. It is as sure as a fact that those gold owners will keep their metal in the years to come.
From where will the gold ETF source their gold once the ETF demand turns higher again? It is clear that a supply shortage is a very likely outcome of renewed interest in gold ETF’s. We know that newly mined gold is very limited compared to the existing above the ground gold, so it cannot meet Chinese and Western demand. In fact, above the ground gold IS the supply. So what happens if the appetite for gold in Asia remains strong, if those existing gold owners do not supply their gold to the market, and Western demand increases again? A likely outcome is that a supply shortage develops on top of an increasing demand, reinforcing the uptrend.
Over the years Chris Vermeulen has identified a price pattern that consistently makes me money time and time again. This pattern is not found in books, nor is it talked about in any trading course or by any elite traders.
What Is It And Why Doesn’t Anyone Talk About It?
Well that is a good question and he thinks the main reason is because no one knows about it. He has mentioned it to a lot of traders and many of them are professional traders yet it completely goes over their head or they are dismissing it because they don’t want others to find out about it.
The other reason could be because traders don’t know what to call it. He gave it a simple name as he just named it what it is, so it is self-explanatory.
While he sees and trade this secret price pattern on all time frames (it does not work on tick charts), the longer the time frame in which it forms the better. If the pattern forms a weekly chart then you are looking at a major investing opportunity that has an average return of 57% return within a few weeks. The daily chart pattern tends to provide 10- 20% return within a few days of this pattern forming.
Subscribers of hisETF Portfolio Newsletter profited twice in February from it locking in 10% and 21.9% trading simple ETFs.
He also mentioned this pattern does not form on baskets of investments like a sector or index. It only takes please on individual investments like stocks and commodities.
Here is what a fellow subscriber said: Chris, Over the years, I’ve learned so much from your videos. One of the set ups I love most, because it has been very profitable is the must be a paid subscriber pattern. I believe subscribe is now forming the last part of this pattern.
So if you want to be making these trades with Chris join his ETF Trading Newsletter todayETF Newsletter
Founder of Technical Traders Ltd. – Partnership Program
The buzz phrase at PDAC 2014 could be described as “cautious optimism.” Executives, analysts and investors seem to believe a corner has been turned but failed to show any excitement or hope beyond that. Some participants estimated that attendance was down 20% from last year and much lower than 2012. I did not attend last year but definitely noticed foot traffic was significantly lower than in 2012. Interest in my presentation this year was much lower than in 2012. Mind you, these are only anecdotal measures of sentiment. However, for me they further underscore that very few seem to believe in the immediate continuation and sustainability of this recovery.
During my flight home I read Mining Weekly’s cover story (the publication given to every attendee) which further exhibits the mild, cautious optimism pervading the industry. The various assertions and comments included: “Road to recovery will be bumpy,” “Most juniors will fail,” “Control costs in an era of lower metal prices,” and “Metals prices have reached a plateau.” Also, there was a mention of strong deflationary forces and deflation, not inflation as the risk. Furthermore, industry titan Rick Rule was quoted in the story and in the Financial Post as saying juniors still need to capitulate. This is simply not the kind of talk that precedes a market decline or prolonged under-performance.
Moreover, some of these comments are divorced from a new reality. The chart below shows the CCI (commodities), CDNX and GDXJ. Commodities have broken out from a three year downtrend and advanced above the 400-day moving average for the first time in two and a half years. Canada’s Venture (CDNX) which consists of mostly commodity exploration companies declined 65% from top to bottom but is now currently trading above its 200-day moving average and at a 10-month high. It was last above that moving average in spring 2011. Meanwhile, GDXJ is holding strong after declining 82% over a more than two and a half year bear market.
The breakout in commodities and end of the downtrend suggests that inflation and not deflation will be the next concern. It also suggests a potential future tailwind for metals prices. The road to operational recovery may be bumpy but that doesn’t mean it will be for the related capital markets. The CDNX is at a 10-month high and GDXJ has rebounded 50% in two months. Meanwhile, I’m surprised by Rick Rule’s bizarre comment about capitulation considering GDXJ just endured an 82% bear market. (Major kudos to Rick for his market skepticism in 2011 and 2012). Capitulation occurred in spring 2013 and a final wave came in December 2013. Since then, most quality juniors have rebounded 100% or more.
Ironically, the time we should be most optimistic is at a market bottom. That is the best time to buy because it has the lowest risk and is when the biggest gains are made. However, the recent bear market remains fresh in the mind of the majority of market participants and company executives. They worry about making another mistake or misleading people so they hedge their views. The toughest time to buy is where we are now, a few months following a major bottom. Prices are materially higher yet sentiment has not shifted enough to displace the bad memories from the preceding bear market. Essentially, there are two reasons (instead of the usual one) not to buy.
Over the past few weeks I have been watching the DOW and Transportation index closely because it looks and feels like the Dow Theory may play out this year and the stock market could take a 15% haircut.
But what if you skipped on the haircut and opted for a 40% refund? What? Keep reading to find out how.
Keeping this post short and sweet, I think the US stock market is setting up for a sharp selloff. And it will look a lot like the July 2011 correction. If my calculations are correct this will happen in the next 3-9 weeks and we will see a 15% drop from our current levels. Only time will tell, but I have a way to hedge against this with very little downside risk to youETF portfolio.
The Dow Theory Live Example for ETF Portfolio
The daily chart of the SP500 index below shows our current trend analysis with green bars signaling an uptrend, orange being neutral, and red signaling bearish price action. Currently the bars are green and we can expect prices to have an upward bias.
The Dow Theory could be in play. When both the Transports (IYT) and the Dow Jones Industrial Average (DIA) cannot make higher highs and start making lower lows, according to the Dow Theory the broad stock market is topping.
We are watching the market closely because they have both made lower highs and lows. This rally could stall in the next couple weeks and if so we expect a 15% correction.
Take a look at the 2011 Stock Market Crash
The chart above shows how fearful traders have a delayed reaction to moving money from stocks to a mix of risk-off assets.
The choppy market condition during August and September clearly helped in frustrating investors and created more uncertainty. This helped prices of this ETF portfolio fund rally long after the initial selloff took place. This is something I feel will take place again in the near future and subscribers of my ETF newsletter will benefit from this move.
Because we have a Dow Theory setup, our risk levels are clearly defined as to when to exit the trade if it does not play out in our favor. But with the potential to make 40% and the downside risk only being 4%, it’s the perfect setup for a large portion of our ETF portfolio. And just so you know this is not a precious metals trade as we are already long that sector and up 10% in that position already.
In this article, contributor Gary Christenson presents the results of his intense efforts to work out a model for the gold price. This “gold model” is not meant to predict short term gold prices, nor is it intended to act as a target price for investors. The aim of the gold model is to derive a “fair value” for gold in a longer term context, based on a fundamental basis. Such a fair value should act as an objective measure to calculate the deviation with gold’s spot price.
As an example, the gold price crash of 2013 was said by mainstream media and financial pundits to bring the gold price back to “acceptable” levels as gold had been in a bubble. While it was true that the gold price was getting ahead of itself in 2011, it was nowhere near a bubble. The “gold model” from Gary Christenson confirms that the gold price was rising too fast, but it’s fair value was nowhere near the levels of its 2013 bottom.
In that respect, it is interesting to note what several famous bankers have said about the gold price. Consider the following quotes. Paul Volcker once said “Gold is my enemy.” Ben Bernanke recently said “Nodoby really understands gold prices and I don’t pretend to understand them either.” Janet Yellen her recent quote was “I don’t think anybody has a very good model of what makes gold prices go up or down.”
So here you have it, a gold model that has been 98% accurate in the past four decades, worked out by an individual who looked at the fundamentals and the big picture, in an unbiased way. Admittedly, we believe bias is the main issue for bankers.
Gold persistently rallied from 2001 to August 2011. Since then it has fallen rather hard – down nearly 40%. This begs the question: “Did the gold bull market end at the top in August 2011 as many mainstream analysts believe?” OR “Was the decline during the past 2.5 years merely a correction in the ongoing bull market?”
The answer, in my opinion, can be found in my gold pricing model that has accurately replicated AVERAGE gold prices after the noise of politics, news, high frequency trading, and day to day “management” have been purged.
I presented the specifics of my model at the Liberty Mastermind Symposium in Las Vegas on February 22, 2014. A detailed presentation would be much too long for this article so the following is a quick summary.
Create a simple model of gold prices based on a few macro-economic variables, NOT including the price of gold.
Each variable must be intuitively sensible in its affect upon the price of gold.
The results must be graphically similar to actual prices for gold since 1971 and be statistically significant.
The most obvious macro-economic variable is the currency supply or some proxy for it. Since 1971 the U.S. currency supply has been increased much more rapidly than the underlying economy has grown. Hence the value (purchasing power) of each currency unit (dollars) decreased and prices, on average, have risen considerably.
Other variables that might be applicable are the CPI, Japanese Yen, real interest rates, dollar index, 30 year T-bond yields, DOW Index, copper prices, national debt, commodity prices, and many more.
A logical and causal relationship can be established between each of these variables and the value of gold based on either the declining value of the currency, or the changing demand for commodities and hard assets versus the demand for financial assets.
My model was created, tested, and refined to include only three variables – simplicity makes the model more credible.
My model attempted to replicate the smoothed annual prices for gold. Smoothing filtered out most of the market noise and clarified what I refer to as an equilibrium or “fair” value for gold.
My model made NO attempt to predict actual weekly and monthly gold market prices.
Smoothing was accomplished by using monthly closing prices for gold since 1971, creating a centered 13 month moving average of those prices, averaging January to December monthly prices to create an annual price, and then making a 3 year moving average of those annual prices.
Smoothing examples: Actual market prices in 1980 went as high as $850 but the smoothed gold price for 1980 was about $460. Actual market prices in December 2013 went to an approximate low of $1,183 but the smoothed gold price for 1980 was about $1,520.
The calculated Equilibrium Gold Price (EGP) had a correlation of 0.98 with the smoothed gold price from 1971 – 2013. Examine the graph of EGP and Smoothed Gold.
The model was both simple and robust. It worked effectively, on average, during gold bull and bear markets, stock bull and bear markets, blow-off tops and crashes, volatile oil prices, Y2K and 9-11, QE, Operation Twist, ZIRP, various hot and cold wars, occasional peace, gold leasing, gold manipulations, and high frequency trading distortions in many markets.
In August of 2011 gold was priced about 30% ABOVE the EGP.
In December of 2013 gold was priced about 26% BELOW the EGP.
Smoothed gold prices are shown in a “gold” color.
Calculated equilibrium gold prices (EGP) are shown in green.
The long-term trend from 1971 – 1980 was up, from 1980 – 2001 the trend was down, and from 2001 to 2012 the trend was up. (Actual gold market high price was August 2011.)
Nixon closed the “gold window” in 1971, removed any semblance of gold backing for the dollar, and thereby enabled the creation of significantly more dollars into circulation. The various measures of “money” supply, official national debt, Dow Index, price of gold, many commodities, and most other prices increased exponentially between 1971 and 2013.
FUTURE PRICES FOR GOLD per the EGP Model
Macro-economic variables continue to increase and decrease as they have for the past 42 years.
The U.S. economy continues along its typical, but weakened, path with government expenses growing more rapidly than revenues, as they have for decades. National debt rises inevitably.
Congress continues its multi-decade habit of borrowing and spending, talking about change, and changing little. The Fed supports the stock and bond markets and continues “liquidity injections” as it deems appropriate to benefit the 1%.
Monetary, political, and fiscal policies will NOT be materially different from what they have been during the past 42 years.
The U.S. will NOT be subjected to global nuclear war, Weimar hyperinflation, or an economic collapse, while we will continue to be subjected to the same Keynesian economic nonsense that has created many of our current “challenges.”
Given the above assumptions, a reasonable projection for the EGP (a “fair” price for gold) in 2017 is $2,400 – $2,900. Remembering that market prices can spike significantly above or crash below the EGP for many months, we could see a spike high above $3,500 or $4,000 in 2017. Extraordinary events such as a global war or dollar melt-down could push prices higher and sooner.
Now that the first leg off the bear market bottom has been completed the mining shares have been consolidating for the last three weeks in preparation for another leg up, and I expect the second leg will be almost as powerful as the first.
As gold is now late in its daily cycle I’m looking for one more dip down into Friday’s employment report to complete the short-term correction. Then I look for gold’s third daily cycle to test the $1425 resistance zone over the next month.
Over the next few days stocks should move up to test or more likely marginally break above 1900 before settling into a consolidation as they await the next FOMC decision on March 19. As stocks settle into this consolidation phase buying pressure will move back into the commodity markets and drive gold aggressively out of the impending daily cycle low.
Then when a third taper also fails to halt the slide in the dollar I look for a mini dollar panic during the second half of March that will drive a very powerful rally in commodities as they move toward an intermediate top.
As gold rallies out of its impending daily cycle low, and especially during the dollar panic later this month, the mining shares should deliver a very powerful second leg up in this initial thrust out of their bear market bottom. I expect GDX will at least test the August highs, and maybe even fill one or both of last April’s gaps before the intermediate cycle tops sometime in early to mid-April.
I think traders need to enter initial positions before the close on Thursday, and if gold is down Friday morning after the employment report use the weakness to complete purchases as I think next week miners will break out of the consolidation zone and begin the second leg up of this brand-new bull market.
The gold price was up sharply at the 6 p.m. open on Sunday evening in New York, but the sellers of last resorts were also there as well. Volume was immense, so the long buyers had no trouble finding a willing short seller to take the other side of the trade. By the London open, volume was almost 50,000 contracts—a monstrous number. The gold price hit its high 15 minutes after London closed for the day—and the gold price got sold down a bit going into the 5:15 p.m. electronic close.
The CME Group recorded the low and high ticks as $1,330.70 and $1,355.00 in the April contract.
Gold close in New York yesterday at $1,350.30 spot, up $21.70 from Friday’s close. Net volume was around 147,000 contracts—and as I mentioned in the first paragraph, more than a third of that came before the London open.
Silver was kept on a pretty short leash on Monday. Every time it rallied above the $21.40 spot mark, there were not-for-profit sellers waiting to sell it back down to that price level again. This happened in Far East trading—and in London and New York as well.
The low and high ticks were recorded as $21.26 and $21.74 in the May contract.
Silver finished the day on Monday at $21.405 spot, up 18 cents from Friday. Net volume was very decent at 48,000 contracts—and a third of that amount was done before the London open as well.