Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

Gold Model Forecasts $4380 Gold Price

Commodities / Gold and Silver 2011 Dec 12, 2011 - 10:04 AM GMT

By: Willem_Weytjens

Commodities

Best Financial Markets Analysis ArticleYou’ve probably heard it many times: “Gold is a good hedge against inflation”.

But IS it? That’s the question we will try to answer in this article.


Let’s have a look at a chart:

The chart above shows us the gold price (left hand scale, red line) since 1968, when the Gold Pool broke down. At that time, the gold price was no longer fixed, and was able to rise (substantially).

From February 1968 to February 1980, gold rose almost 25-fold, from $35,50 per ounce to as high as $875 per ounce.

From that point, gold started a multi-decade long decline towards $250 per ounce at the beginning of the 21st century. In the same time period, CPI doubled from 78 to 175,60.

From then on, gold rose substantially, from about $250 to $1,920 earlier this year (x7.68), while the CPI rose from 175,60 to 226,42 (only 29%).

So for that matter, it seems there isn’t really a strong correlation between the gold price and the general price level.

I thus figured there had to be other forces at play that influence the price movement of Gold, and yes, I think there are…

Eddy Elfenbein from Crossingwallstreet wrote an article that really intrigued me. He had found a “model” to explain the movements in the Gold price.

He said:

  • The first and perhaps the most significant key takeaway is that gold isn’t tied to inflation. It’s tied to low real rates which are often the by-product of inflation.
  • The second point is that when real rates are low, the price of gold can rise very, very rapidly.
  • The third is that when real rates are high, gold can fall very, very quickly.

Special thanks goes to Jake from EconompicData, who also wrote about this topic, and who has helped me a lot with solving formulas.

So mr. Elfenbein wrote that gold isn’t tied to inflation. It’s tied to low real rates which are often the by-product of inflation (high nominal rates can still lead to low real rates if inflation is also high).

That’s an interesting observation, as Ben Bernanke promised to keep rates at record low levels throughout 2013 in order to stimulate the economy.

When nominal rates are near zero, every bit of inflation we get will lead to negative real yields, causing the gold price to rise substantially over the next two years, according to the model.

I wanted to see it myself, and I was thinking if I could improve the “model”. I think I managed to do so, as my model “gold price” has a higher correlation with the gold price. With a lot of formulas in excel, I calculated the real short term rates, level of inflation, and “calculated” a model price for gold, based on the models of Jake and Eddy.

I didn’t calculate everything manually (I used about 2,000 combinations), but instead worked with a Macro in Excel, which makes my computer do all the work for me.

It took the Macro about 1 hour to calculate every combination of 100 leverage factors and 20 deflator factors.

I found out that a deflator of 2,15% and 2,20% gave the best results, with a leverage between 5.7 and 6.95, instead of the 2% Deflator and 8x leverage as Jake and Eddy found out.

Based on these combinations, I was able to reproduce a “model” price for gold.

The results were rather impressive to say the least. For example, the model price of gold based on a deflator of 2.15% and a leverage factor of 6.90, had a 95.52% correlation with the actual gold price:

For those who prefer to look at logarithmic charts:

Now, what does this all mean? Does the model have the potential to “forecast” the gold price? Maybe. It depends on the nominal short term rates, and the level of inflation. The first one is pretty easy to “guesstimate”, as Bernanke promised to keep rates near zero for the next 2 years. The average annual (officially reported) rate of inflation over the last 43 years, has been 4.44%.

If we assume we would see a similar rate of inflation over the next 2 years, the Gold model “forecasts” a gold price of $4,380:

To put things in perspective, please have a look at the logarithmic chart if you think the chart above looks “bubbly”.

From the beginning of this bull market, it would “only” be a 17.5-fold increase, compared to the 25-fold increase from 1968 to 1980. A similar 25-fold increase would lead to a gold price of about $6,250.

We now have another reason to believe legendary gold experts Jim Sinclair, Alf Fields and plenty of other analysts who are fully confident of a parabolic rise in the price of gold with targets of $4,500 and above.

For more analyses, trading updates and interesting articles, please visit www.profitimes.com!

Willem Weytjens

www.profitimes.com

© 2011 Copyright Willem Weytjens - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014