Short and Long Term Forecasts

Predicting the likely path of the prices of the metals in the near term is easy. Just look at the fundamentals. We have invested many man-years in developing the theory, model, and software to calculate it. Every week we publish charts and our calculated fundamental prices.

 

A selection of 1 and ½ ounce gold bars – definitely more fondle-friendly than bitcoin, but a bit more cumbersome to send around. [PT]

 

However, predicting the outlook for a longer period of time is much harder. The fundamental shows the relative pressures in the spot and futures markets, but they only show a snapshot. They do not predict how those pressures might change. For that, one looks at the dollar of course, credit, interest rates, other currencies, the economy, and even wild cards like bitcoin.

 

Review of Last Year’s Call

We did not publish an Outlook 2017, because we were in the midst of developing and launching not just our website, but the engine that powers it, our data science platform. We will look at much of this data in this Outlook 2018.

To keep ourselves honest, we like to review our call from the prior year. Without a 2017 call, we will briefly look at what we said in Outlook 2016:

 

We think that buying gold now is likely to turn out to be a good deal. We do not promise that the price can’t stay low (obviously, if it can be low now it can remain low or even go lower). We simply see value here. To those looking to trade, you might buy gold for a trade.

In silver, we’re in a much better situation than last year when silver was overpriced. The price has come down. It’s now close to the fundamental, plus or minus. However, there just isn’t a strong case for buying it now. There is no case for buying silver for a trade. It’s just a roll of the dice. The gold to silver ratio closed the year around 76.7. Our model suggests it could be headed over 85.

 

That did not turn out to be a bad call. Gold ended 2015 around $1060. By the middle of the year, its price had shot up to about $1370. This was an overshoot of its fundamentals (which we called in that year’s July 3 Supply and Demand Report). We said market price was $200 above the fundamental price. By the end of the year, the market price was $1150. Our call at the start of the year was right, and so was our call at the mid-year spike.

 

Gold, weekly – although skepticism remains fairly pronounced in view of the Fed having embarked on a rate hike cycle, the character of the gold market has clearly changed for the better since late 2015. It currently trades at the lower boundary of a strong resistance area between ~$1350 to ~$1400. The gold price has been rejected five to six times from this area since 2013 (depending on how one counts the breakout attempts, one could even argue it was seven or eight times – n.b., this is excluding the current attempt, the outcome of which is not yet known). As a general rule, the more often a lateral resistance or support area is tested, the more likely it will eventually give way. [PT]

 

Silver ended 2015 just under $14, and spiked to over $21 in 2016 — a 50% gain. In our July 3 Report, we said it was $3 above its fundamental price. That is a call for a big drop. The market obliged us, with the price coming down to Earth.

By year’s end, it was under $16, +$2. Not a bad dice roll in our Outlook 2016.

The gold-silver ratio rose to a high of more than 83 in early 2016 (and again in 2017), also per our call.

 

The initial decline in the gold-silver ratio from April 2011 to sometime in 2013 – 2014 erased much of the effects of extreme speculation that drove silver prices to nearly $50 in 2011. Since then, the weakness in the ratio seems to make little sense, as silver normally tends to rise relative to gold in times of increasing economic confidence (this is due to its far larger industrial demand component). A possible conclusion one could draw from this unusual behavior is that the precious metals markets believe said confidence to be just paper-thin and bound to come to grief. The same message is sent by the gold market itself, but the gold-silver ratio may be an even more relevant datum, as it is not distorted by exchange rate effects (i.e., the ratio will look the same regardless of which fiat currency is used to price the metals in). Whatever the precious metals markets are sensing to come down the pike is unlikely to be pleasant. [PT]

 

How Not to Think about Gold

There are several popular approaches to analyzing gold. If you visit some alternative investing or gold sites, you will find conspiracy theories about price manipulation, rumors, out-of-context-factoids, and finally mining production and manufacturing consumption.

Our view is that the dollar is indeed dying, but it is not via the instant white hot supernova of hyperinflation. It is by a long drawn-out asphyxiation, the drowning of a competent swimmer out at sea.

We have written a lot to debunk claims of price manipulation (here is our recent open letter to Ted Butler, with graphs of our data going back to 1996). There are many others on our site.

We would put rumors, Indian gold import numbers, and news into the same bucket. Even when factual, these items are the investing world’s equivalent of an attractive nuisance—they can lure you to financial harm.

Finally, there is electronics and jewelry consumption, and mine production. We firmly insist that gold and silver cannot be understood by looking at small changes in production or consumption. The monetary metals cannot be understood by conventional commodity analysis.

This is because virtually all of the gold ever mined in human history is still in human hands (to a lesser extent for silver). The World Gold Council estimates  total gold stocks at 188,538 metric tons at the end of 2017 and reported mine production averaging 3,247 tonnes over the past three years.

This is just 1.7% of then-existing stocks. In other words, it would take 58 years at current production levels just to produce the same amount of gold as is now stockpiled.  If total gold mining is 1.7% of gold inventories, then small changes within that 1.7% are not likely to have much impact on the gold price.

 

How We Think About Gold

The implications of this are extraordinary. All of that stockpiled gold represents potential supply, under the right market conditions and at the right price. Conversely — unlike in ordinary commodities — virtually everyone on the planet represents potential demand.

Why would people be willing — not just today, in the wake of the great financial crisis of 2008 and unconventional central bank response, but for thousands of years — to go on accumulating gold and silver?

There is only one conceivable answer. It is because these metals are money. Compare gold to oil. The marginal utility of oil — the value one places on the next barrel compared to the previous — declines rapidly. For oil, it falls rapidly because once your tank is full, you have that storage problem — assuming you even directly use oil at all.

However, the marginal utility of gold hardly declines at all. People are happy to get the 1,001st ounce, and accept it on the same terms as the 1,000th or the 1st ounce.

We therefore think that changes in the desire to hoard or dishoard gold have a big impact on price and are more important than small changes in annual supply and demand flows.

 

How We Analyze the Gold Market

We think of the market as the coming together of 5 different primary groups.

 

 

  1. Buyers of metal. These are typically hoarders. Unlike buyers of other commodities, they don’t have to incorporate it into a product and sell it to make a profit (jewelry manufacturers being a very small part of the market, as discussed above). So there is no particular price that is necessarily too high, other than whatever their notion of a fair price is at any given moment. It’s worth noting that jewelry manufacturers are mere intermediaries, buying gold to put into product that is typically held owned for a long time by the buyer. And often held as money.
  2. Sellers of metal. They are dishoarding, for whatever reason. They may think the price has hit a high enough level to attract their greed, or a low enough level to activate their fear. Miners are a subcategory of sellers, though miners are price takers.
  3. Buyers of paper (e.g. futures). These are speculators, with three key differences from buyers of metal. One, they use leverage. Two (for that reason and others) they have a short time horizon. Three, their exclusive goal is to make a trade for dollar gains.
  4. Short sellers of paper. Not nearly so big a group as popularly imagined, there are people who take the two lopsided risks of (1) shorting something with limited profit and unlimited loss potential and (2) fighting a 100-year trend. These people are nimble and aggressive and certainly play for the short term.
  5. Warehousemen, aka market makers. If few people are willing to bet on a rising dollar (i.e. falling gold price), then who sells gold futures? Aren’t futures a zero-sum game, with a short for every long? Enter, the warehouseman. He stands ready to carry gold for anyone who wants future delivery. If you buy a future, you are signaling that you want gold, not to be delivered now, but at some date in the future. For a profit, this group will sell it to you. How do they do that? They buy metal in the spot market and simultaneously sell a contract for future delivery. They don’t care at all about price, as they have no exposure to price. They respond to spread. Suppose they could buy gold in the spot market for $1,350 and sell it for Dec delivery for $1,362. That is 0.9% for six months, or 1.8% on an annualized basis. That is not so attractive at the moment, with the Fed in one of its little rate-hiking fits (more on interest rates below).

 

The five market participants interact to form a constantly changing dynamic. It is this dynamic that we study when we look at spreads between spot and futures, and changes to these spreads. Monetary Metals has developed a proprietary model based on this theory, which outputs the Fundamental Price for each metal. This is updated as the market changes every day. We have published more on the theory.

 

Our Numbers 

Gold closed the year 2017 at $1,303. The Monetary Metals Fundamental Price was just about the same as the market price. Here is a graph of the market price overlaid with the Monetary Metals Fundamental Price.

 

Gold – market price vs. fundamental price

 

Silver closed at $16.90. The Monetary Metals Fundamental Price closed the same. Here is a graph of the market price overlaid with the Monetary Metals Fundamental Price.

 

Silver – market price vs. fundamental price

 

In both metals, the fundamental price rose, moving through the year with less volatility than the market price.

This year is interesting, as the fundamental prices ended at the same level as the market prices for both metals. Whatever predictions we may make, cannot be made based on the fundamentals.

Here is a chart of the price of the dollar in gold terms overlaid with the continuous basis (our measure of abundance) and co-basis (scarcity).

 

Dollar priced in milligrams of gold vs. continuous gold basis and co-basis

 

The dollar is going down from almost 27mg gold to under 23mg (that’s $1,130 to $1360 stated in dollar-centric terms). There is an increased abundance of gold at the higher price, but the increase is not commensurate with the price move. In other words, the fundamentals of gold have strengthened during this move and likely were a driver (if not the driver). Still, it must be noted, there is no backwardation in sight in gold.

In silver, the March contract has moved into what we call temporary backwardation—the tendency of the expiring contract to be pushed down due to selling pressure from traders who roll their positions to the next contract. Here is a similar graph for silver as shown for gold, above.

 

The dollar priced in grams of silver vs. continuous silver basis and co-basis

 

The basis moves are similar. The price move, not so much. There is little trend. So what do we expect this year?

 

Our Call

From the crisis through 2011, the prices of the metals ran up due to the inflation trade: “Oh my God, they are printing money to infinity! Buy gold and silver before they go to the moon!

Then, that trend ended. While the money supply certainly did not collapse, supply and demand fundamentals caused lower prices in one commodity after another. Copper, for example, peaked in early 2011. Oil had an epic collapse. The decline in wheat is still ongoing.

The next several years were a period of despair alternating with hope as the prices of the metals fell and fell, and then rallied. It took from August 2011 when the price of gold hits its peak just under $2,000 until December 2015, when the price hit its trough a bit over half that level.

 

Conclusion

To anyone who does not yet own gold or silver, we offer the same advice as always. You should own some, period. Without regard to price. And we think that buying gold or silver now is likely to turn out to be a good deal.

For our gold and silver price forecast for 2018 and how we came to it, as well as an in-depth explanation of the points made above, read the full Monetary Metals Outlook 2018 (free registration required).

 

© 2018 Monetary Metals LLC. All Rights Reserved.

 

Charts by: StockCharts, Monetary Metals

 

Chart and image captions by PT

 

Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

3 Responses to “Monetary Metals Brief 2018”

  • Hans:

    Back into Au after several years of absence. Positioned into MUX
    at $2.40 per share. It represent about 8% of our trading account.

    Since April 20, 2016, Ag prices have been very weak and stuck
    in a narrow trading range.

    Dr Weiner is giving sound advice, that we all should have some
    PMs in our portfolio. Depending on the circumstances, my range
    would encompass 5% too as much as 25%.

  • utopiacowboy:

    One thing I have noticed is that any move by gold that is not confirmed by the mining stocks seems to be temporary. The mining stocks have languished since 2016 so until they break out upwards, there does not seem to be any reason to go all in on gold. Not sure why this is true however because I would think the mining stocks should be up at least somewhat but the fact remains that they are not.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • What Kind of Stock Market Purge Is This?
      Actions and Reactions Down markets, like up markets, are both dazzling and delightful. The shock and awe of near back-to-back 1,000 point Dow Jones Industrial Average (DJIA) free-falls is indeed spectacular. There are many reasons to revel in it.  Today we shall share a few. To begin, losing money in a multi-day stock market dump is no fun at all.  We'd rather get our teeth drilled by a dentist.  Still, a rapid selloff has many positive qualities.   Memorable moments from...
  • How to Buy Low When Everyone Else is Buying High
      When to Sell? The common thread running through the collective minds of present U.S. stock market investors goes something like this: A great crash is coming.  But first there will be an epic run-up climaxing with a massive parabolic blow off top.  Hence, to capitalize on the final blow off, investors must let their stock market holdings ride until the precise moment the market peaks – and not a moment more.  That’s when investors should sell their stocks and go to...
  • US Stocks - Minor Dip With Potential, Much Consternation
      It's Just a Flesh Wound – But a Sad Day for Vol Sellers On January 31 we wrote about the unprecedented levels - for a stock market index that is - the weekly and monthly RSI of the DJIA had reached (see: “Too Much Bubble Love, Likely to Bring Regret” for the astonishing details – provided you still have some capacity for stock market-related astonishment). We will take the opportunity to toot our horn by reminding readers that we highlighted VIX calls of all things as a worthwhile...
  • When Budget Deficits Will Really Go Vertical
      Mnuchin Gets It United States Secretary of Treasury Steven Mnuchin has a sweet gig.  He writes rubber checks to pay the nation’s bills.  Yet, somehow, the rubber checks don’t bounce.  Instead, like magic, they clear. How this all works, considering the nation’s technically insolvent, we don’t quite understand.  But Mnuchin gets it.  He knows exactly how full faith and credit works – and he knows plenty more.   Master of the Mint and economy wizard Steven Mnuchin and...
  • Why I Own Gold and Gold Mining Companies – An Interview With Jayant Bandari
      Opportunities in the Junior Mining Sector Maurice Jackson of Proven and Probable has recently interviewed Jayant Bandari, the publisher of Capitalism and Morality and a frequent contributor to this site. The topics discussed include currencies, bitcoin, gold and above all junior gold stocks (i.e., small producers and explorers). Jayant shares some of his best ideas in the segment, including arbitrage opportunities currently offered by pending takeovers – which is an area that generally...
  • Seasonality of Individual Stocks – an Update
      Well Known Seasonal Trends Readers are very likely aware of the “Halloween effect” or the Santa Claus rally. The former term refers to the fact that stocks on average tend to perform significantly worse in the summer months than in the winter months, the latter term describes the typically very strong advance in stocks just before the turn of the year. Both phenomena apply to the broad stock market, this is to say, to benchmark indexes such as the S&P 500 or the...
  • The Future of Copper – Incrementum Advisory Board Meeting Q1 2018
      Copper vs. Oil The Q1 2018 meeting of the Incrementum Fund's Advisory Board took place on January 24, about one week before the recent market turmoil began. In a way it is funny that this group of contrarians who are well known for their skeptical stance on the risk asset bubble, didn't really discuss the stock market much on this occasion. Of course there was little to add to what was already talked about extensively at previous meetings. Moreover, the main focus was on the topic...
  • “Strong Dollar”, “Weak Dollar” - What About a Gold-Backed Dollar?
      Contradictory Palaver The recent hullabaloo among President Trump’s top monetary officials about the Administration’s “dollar policy” is just the start of what will likely be the first of many contradictory pronouncements and reversals which will take place in the coming months and years as the world’s reserve currency continues to be compromised.  So far, the Greenback has had its worst start since 1987, the year of a major stock market reset.   A modern-day...
  • Strange Economic Data
      Economic Activity Seems Brisk, But... Contrary to the situation in 2014-2015, economic indicators are currently far from signaling an imminent recession. We frequently discussed growing weakness in the manufacturing sector in 2015 (which is the largest sector of the economy in terms of gross output) - but even then, we always stressed that no clear recession signal was in sight yet.   US gross output (GO) growth year-on-year, and industrial production (IP) – note that GO...
  • US Equities – Retracement Levels and Market Psychology
      Fibonacci Retracements   Following the recent market swoon, we were interested to see how far the rebound would go. Fibonacci retracement levels are a tried and true technical tool for estimating likely targets – and they can actually provide information beyond that as well. Here is the S&P 500 Index with the most important Fibonacci retracement levels of the recent decline shown:   So far, the SPX has made it back to the 61.8% retracement level intraday, and has weakened...
  • Update on the Modified Davis Method
      Whipsawed Frank Roellinger has updated us with respect to the signals given by his Modified Ned Davis Method (MDM) in the course of the recent market correction. The MDM is a purely technical trading system designed for position-trading the Russell 2000 index, both long and short (for details and additional color see The Modified Davis Method and Reader Question on the Modified Ned Davis Method).   The Nasdaq pillar...   As it turns out, the system was whipsawed,...
  • Market Efficiency? The Euro is Looking Forward to the Weekend!
      Peculiar Behavior As I have shown in previous issues of Seasonal Insights, various financial instruments are demonstrating peculiar behavior in the course of the week: the S&P 500 Index is typically strong on Tuesdays, Gold on Fridays and Bitcoin on Tuesdays (similar to the S&P 500 Index).   The quest for profitable foresight...[PT]   Several readers have inquired whether currencies exhibit such patterns as well. Are these extremely large markets also home to...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist