Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Dow Stock Market Dow Trend Forecast Current State - 22nd Apr 21
Gold Rebounds Amid Positive Economic Reports - 22nd Apr 21
China's record first quarter fuels strong expansion in 2021 - 22nd Apr 21
Gold Price Next Key Level - 22nd Apr 21
Here's What to Look For When Hiring a Real Estate Agent - 22nd Apr 21
Ethereum EIP 1559 and Raven Coin - 21st Apr 21
Gold, USDX: The Board is Set, the Pieces are Moving - 21st Apr 21
World Economies Need to Find a Lot More COPPER! - 21st Apr 21
DogeCoin CRASH! Time to Start Mining BOODGIE Coin! Crypto Mania 2021 - 21st Apr 21
Pausing Stocks and Gold Fireworks - 21st Apr 21
Precious Metals and Miners Start of New Longer-Term Bullish Trend - P2 - 21st Apr 21
Looking For A Mortgage Broker? Here Is How To Hire One - 21st Apr 21
Amazon AMZN Stock PRIMEDAY SALE! Trend Analysis - 20th Apr 21
Stock Market Sentiment Speaks: You May Not Believe My 2021 Targets - 20th Apr 21
Stock Market Phase Two Projection - 20th Apr 21
Are Precious Metals & Miners Starting A New Longer-Term Bullish Trend? - 20th Apr 21
Inflation: First the Gain, Then the Pain… - 20th Apr 21
8 Stock Market Indicators in 1: Here's the Message of the Panic/Euphoria Model - 19th Apr 21
Gold - You Can Win a Battle, but Still Lose the War - 19th Apr 21
Will Interest Rates Rally Further Push Gold Price Down? - 19th Apr 21
Gold Fireworks Doubt the Official Inflation Story - 19th Apr 21
YuanPay Team Discuss The Process Of Crypto Diversification - 19th Apr 21
Central Banks May Ramp Up Gold Buying - 18th Apr 21
How to Get Rid of Driveway Weeds With Just WATER! 6 Months later NO Weeds, Ultimate Killer! - 18th Apr 21
State of the European Markets - DAX, FTSE, CAC, AEX, SMI, IBEX 35, S&P/MIB, Euro Stoxx 50, RTS - 18th Apr 21
Einvestment Fund: What You Need To Know About Investments - 18th Apr 21
Google Alphabet (GOOG) AI Deep Mind Stock Trend Analysis - 17th Apr 21
Stocks and Bonds Inflationary Slingshot - 17th Apr 21
Best Smartphone Selfie Stick Tripod Review by ATUMTEK Works with Samsung Galaxy and Iphone - 17th Apr 21
How to Give Budgie's First Bath | Easy Budgie Bathing and Water Training with Lettuce - 17th Apr 21
Record-breaking Decrease in New Passenger Vehicle Sale in Europe - 17th Apr 21
US Stocks Climb A “Wall Of Worry” To New Highs - 16th Apr 21
Gold’s Singular Role - 16th Apr 21
See what Anatomy of a Bursting Market Bubble looks like - 16th Apr 21
Many Stock Market Sectors Are Primed For Another Breakout Rally – Are You? - 16th Apr 21
What Skyrocketing US Home Prices Say About Inflation - 16th Apr 21
Still a Bullish Fever in Stocks? - 16th Apr 21
Trying to Buy Coinbase Stock on IPO Day - Institutional Investors Freeze out Retail Investors - 15th Apr 21
Stocks or Gold – Which Is in the Catbird Seat? - 15th Apr 21
Time For A Stock Market Melt-Up - 15th Apr 21
Stocks Bull Market Progression Now Shows Base Metal Strength - 15th Apr 21
AI Tech Stocks Buy Ratings, Levels and Valuations - 14th Apr 21
Easy 10% to 15% Overclock for 5600x, 5900x, 5950x Using AMD Ryzen Master Precision Boost Overdrive - 14th Apr 21
The Current Cannabis Sector Rally Is Pointing To Another Breakout - 14th Apr 21
U.S. Dollar Junk Bond Market The Easiest Money in History - 14th Apr 21
The SPY Is Nearing Resistance @ $410… What Is Next? - 14th Apr 21
The Curious Stock Market Staircase Rally - 14th Apr 21
Stocks are Heating Up - 14th Apr 21
Two Methods in Calculating For R&D Tax Credits - 14th Apr 21
Stock Market Minor Correction Due - 13th Apr 21
How to Feed Budgies Cucumbers - Best Vegetables Feeding for the First Time, Parakeet Care UK - 13th Apr 21
Biggest Inflation Threat in 40 Years Looms over Markets - 13th Apr 21
How to Get Rich with the Pareto Distribution - Tesco Example - 13th Apr 21
Litecoin and Bitcoin-Which Is Better? - 13th Apr 21
The Major Advantages Of Getting Your PhD Online - 12th Apr 21
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Gold Price Plunge - Where's the Opportunity?

Commodities / Gold and Silver 2013 Apr 17, 2013 - 03:50 PM GMT

By: Rory_Gillen

Commodities

Never a dull day in markets! With Japan entering the central bank quantitative easing game, currency devaluation as a global theme is accelerating, yet the gold price has just succumbed to the most serious correction since the gold bull market started in 2001.


As I write, the gold price has fallen 10% in the past two days, and has now declined decisively through key support levels in the $1,525-1,550 area that had held good for the past 16 months. The gold price is now down 25% from the peak. The gold bulls have been mauled. Yet, it can't be too surprising. Gold offers no income, and it appears that the reasons for buying have become less clear cut of late. The key US economy is improving, equities (overall) are doing well and inflation, as a threat, is nowhere in sight.

Over the centuries, gold has protected investors against inflation. But that is all gold does. It is not a productive asset, and over the long-haul has never matched the returns from real businesses (equities), and most likely never will.

As I outlined previously, for some time now the difficulty with an unqualified bullish gold argument has been that the gold price has already priced in a substantial uptick in inflation, accordingly to my calculations at least. The enclosed chart highlights two gold prices. The first (solid) line highlights the actual gold price from $35 dollars an ounce in 1935 to the current price of $1,410 an ounce. The second (broken) line highlights what the gold price would have been, and would now be, had the gold price simply risen in price to match recorded inflation. The chart has been suggesting for some time that the gold price is ahead of itself.



At the top of the last great gold bull market in January 1980, the gold price had over-shot the likely rise in inflation, and spent 20 years correcting. From 2001 to the current date, the price of gold has risen from a low of $255 an ounce to $1,410 an ounce, which has not only made up for the initial undervaluation, but additionally has priced in investors expectations of a substantial rise in inflation.

The trouble, of course, is that there is no sign of an out-of-control inflationary spiral, not yet anyhow. With all the quantitative easing, it is natural to conclude that inflation is the inevitable outcome. I buy that argument, too. The tricky point is timing. Perhaps the slowdown in emerging markets, falling commodity prices and now a falling gold price are signaling that deflationary forces are, once again, gaining the upper hand. In that context, a correction in the gold bull market seems entirely logical to me.

In markets, of course, the baby often gets thrown out with the bath water. While those holding gold from higher levels might be nursing some losses, spare a thought for the gold miners. Collectively, this subsector of the global equity market is down well over 50% from August 2011 levels. The world's largest gold producer, Barrick Gold, is back to 2005 share price levels, currently trades at its balance sheet value and on just 6 times expected 2013 earnings, and offers a dividend yield of 3.3% (covered by earnings 5 times). Bears of the gold miners say that their earnings have not been benefiting from the strength of the gold price. Perhaps the bears lenses are not long enough. From 2003 to 2012, Barrick Gold increased its earnings from $0.32 to $3.73 a share for an 11-fold increase (source: Valueline).

My own view is that inflation will appear in spades, in time, in one form or another. Currency devaluation lowers the value of your assets abroad; the inverse of inflation if you like. Gold, in my view, is a great protector against the inevitable devaluation of currencies which are currently burdened by too much debt in the global economy. Whether you see it or not, the consequences of currency devaluation are that your local currency assets are worth less, just the same as if inflation was rampant.

But gold is not the only protector. In fact, the speed and severity of the decline in gold mining share prices has probably just given us the tell-tale buy signal of capitulation in markets - the scary cascading decline in prices, as everyone heads for the exit at the same time. If good fundamental values are on offer at the end of the selling frenzy then the buy signal becomes compelling.

In other words, the gold price could be a side-show, and if it even stabilises around current levels, on a 2-3 year view, the outsized returns from here are more likely to be delivered by the gold miners.

Rory Gillen

GillenMarkets.com

Rory is the founder of GillenMarkets.com and the author of 3 Steps to Investment Success along with being a regular contributor to the media on issues affecting the financial services industry. He is a qualified Chartered Accountant, a former senior fund manager with Eagle Star, Ireland (now Zurich Ire.) and a co-founder of Merrion Capital in 2000 where he was Head of Equity Research among other roles for several years. In all, he has spent over twenty five years working in the financial services industry. He founded GillenMarkets in 2005 as a stock market training company and obtained approval from the Central Bank of Ireland to provide investment advice in 2009. He is married with three children and lives in Greystones, Co. Wicklow, Ireland

© 2013 Copyright GillenMarkets - 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.


© 2005-2019 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

6 Critical Money Making Rules