It’s the start of a new year. The question on everyone’s mind is
whither the prices of gold and silver? This Brief presents our answer (and
the full Monetary Metals Outlook 2015 report gives our reasoning).
One approach to the question of price is to draw a line,
extrapolating the past trend into the future. Here is the graph for
gold.
This line would give us a gold price around $1000 at the end of 2015.
If we did it for silver (not shown), we would get around $10.
We don’t think that most traders would do something this simple
(though some mainstream anti-gold commentators might). Our point is that
technical analysis is about looking at the trend. We do not believe that the
past trend in the gold price is likely to be a good predictor of the price in
the future, because the past drivers of the price won’t be operative in the
future.
Another approach is to plot gold against M1 money supply. Here’s what
that looks like.
This implies that the price already ought to be well over $2,000 and
unless central banks put down their keyboards and back away, it will be
hundreds of dollars higher by the end of 2015.
We don’t believe this approach, or any approach based on the quantity
of money, is valid. At best, one can find correlation without causality. For
example, some people thought that there was a correlation between the winning
conference of the Super Bowl and the presidential election (an NFC win was
supposed to forecast a Democratic president). We think this chart proves
there is no causal link between money supply and the gold price.
Other analysts attempt to calculate a gold price based on inflation—by which they mean rising
consumer prices. They say gold should do well in inflation. And, they say
that it should be coming any day now because look at how fast the money
supply is growing. We don’t think that the money supply drives consumer
prices any more than it drives the gold price. The crashing commodity markets
over the past few years—notably oil in the second half of 2014—should once
and for all debunk this idea.
Gold is not purchased for consumption. So even if consumer prices
were rising, that does not mean that the gold price must rise. Or, vice
versa. Consumer prices are influenced by numerous variables such as
efficiency of production that have nothing to do with gold.
Many fall back on the fundamental argument for gold and silver. Paper
currencies are now being debased recklessly. Every central bank in the world
has openly declared its intent to beat down its currency. This is true, paper
currencies have been falling for decades. We believe they will all go to
their intrinsic value—zero. There’s just one catch, it doesn’t necessarily
have to happen tomorrow morning.
So the past gold price doesn’t predict the gold price of the future.
Any correlation between the gold price and macroeconomic indicators is
temporary. And, we can’t trade gold based on the premise that paper
currencies will meet their final fates. So where does this leave us?
We first need a method of measuring current supply and demand
fundamentals in the monetary metals. They are quite different from all other
commodities, as humanity has been accumulating them for millennia. We discuss
our methodology and show our data and reasoning in the full report. In this
brief, we will just skip to the bottom line and give our year-end Fundamental
Prices for gold and silver.
They are $1,319 for gold and, brace for it, $15.10 for silver. Both
of these numbers have come up a little in the first weeks of the year, but
not enough to change our view of the market as it stands now.
That’s the key phrase: as it
stands now. The supply and demand fundamentals emerge from a
dynamic interplay between several kinds of market participants (we describe
this in more detail in the full report). At the moment, it’s not showing any
signs of major breakouts. There simply is no reason today to back up the
truck and load up on gold—much less silver. (If you don’t own any, then our
advice is to go buy a little—not for trading but for holding—and don’t worry
about the price).
That said, a sea change is coming.
To have any chance of predicting it, we have to understand what
drives people to buy gold. We don’t mean what news stories make people hit
the buy button on their futures workstation, or buy GLD calls on E-Trade.
Speculators, especially those who buy with leverage, cannot create a durable
and long-term move higher in price. They are just trying to front-run what
they believe will happen, and often end up front-running only each other.
What makes people buy gold coins and bars, and stick them under the
mattress for years or decades?
The answer is simple, but a paradigm shift from everything we’ve all
been taught in government schools, watched on TV, read in the financial news,
and learned in Econ 101. Gold is the only financial asset that is not someone
else’s liability. There are plenty of other financial assets; the world is
overflowing in paper derived from paper, stacked on top of paper. And every
one of them depends on a counterparty servicing the debt and making payments.
There are also many tangible assets such as antique cars, real estate, and
art work. Every one of them is illiquid in good times, and may be impossible
to sell in a crisis.
Gold is unique for these reasons.
Ignoring the speculators, who only buy gold to sell it for a quick
gain when the price rises, or to cut losses when the price falls, who buys
gold to hold for the long term? What are their motivations?
Anyone in the world buys gold when they don’t like the interest rate
offered on paper, and especially when they don’t like the rising risks.
Based on the price and supply and demand moves so far, it is likely
that the price of gold will end the year higher than it ended 2014. However,
silver will fall if the speculators currently holding it up give up.
In this annual report, we’re not just trying to look at whether the
metals are over- or under-priced. We are trying to predict a change in attitudes.
It is not a matter of if, but of when.
We think the sea change is more likely than not to begin in 2015. We
don’t use the term “sea change” lightly. The crisis of 2008 was the beginning
of a credit collapse. Most market observers believe that the central banks
fixed the problem, and have been talking of the “green shoots” and “nascent
recovery” and “GDP growth” for years.
It is noteworthy that even the skeptics have accepted that the system
will hold together. Most of them have given little thought beyond how to make
more dollars. Even gold is just a vehicle to speculate to make dollars. In
other words, few have been worrying about default risk. They have focused on inflation, and trading to get a higher
rate of return than that.
This means they have not focused on counterparty risk or credit
quality. We think this will change in a big way.
At the moment, we see little reason to put a lot of
capital in harm’s way betting on a rise in the gold price, much less on
silver. But that’s why we reassess the supply and demand fundamentals every
week in our Supply and Demand Report. We will report on changes as they
occur.
This Monetary Metals Brief 2015 is based on the full
Monetary
Metals Outlook 2015 report. The full report contains
graphs of the monetary metals’ Fundamental Prices for 2014, a fuller
discussion of gold, our macroeconomic views including the resent crisis in
Switzerland, and our supply and demand theory.
© 2015 Monetary Metals LLC. All Rights Reserved.
