Breaking News: COMEX paper gold contracts closed on Wednesday, August 7, at $1,513, up from $1,274 on May 22. Gold bottomed at $1,045 in December 2015. The S&P 500 Index closed at a new all-time high on July 26.
Gold closed at its highest price since 2013.
What Happens Next?
- We don’t know. Gold has disappointed for years, but central banks must “inflate or die.” Expect more QE, lower interest rates and excessive political and central bank manipulations.
- But the more important question is: Are the COMEX prices for paper gold a fair value for the metal, or are they misrepresentative of what prices should be in this debt-based QE manipulated economy?
- Should gold prices be higher or lower?
- Consider the following graph of actual gold prices (each annual data point is the average of about 250 daily prices) and calculated gold prices based on an updated empirical model.
WHAT THIS GRAPH DOES NOT DO
- It is an empirical model, NOT a mathematical proof. It guarantees nothing. While the model has worked for five decades, it could become less effective tomorrow, next year, or never.
- The model does NOT use gold or silver prices to produce calculated gold prices.
- It is NOT a price prediction for paper gold contracts on the COMEX.
- It is NOT a timing model. You shouldn’t TRADE based on this model.
WHAT THIS GRAPH DOES
- The model shows an estimated value for (annual average) gold prices based on macroeconomic variables. It is a valuation model.
- The calculated gold model uses official national debt, crude oil, and the S&P 500 Index as input variables.
Test the Assumptions
- Gold prices rise, along with most other prices, as the banking cartel devalues the dollar and pushes currency units into circulation. A proxy for inflationary price increases is the official U.S. National Debt adjusted for population growth.
- Official National Debt in 1971 was $400 billion. Today it exceeds $22,000 billion – over $22 trillion. Debt and prices will increase until the financial system breaks or resets.
- Gold prices rise along with crude oil, the most important global commodity.
- Crude oil sold for $2.00 in 1971. Today it sells for $51.00. It peaked at $147 in 2008. Crude oil prices rise because the banking cartel devalues the dollar, changing supply and demand, and because commodities are sometimes more desired than paper assets.
- Over the long-term, commodity prices, including oil and gold, rise and fall opposite to the S&P 500 Index. When investors favor stocks (and paper investments) commodity prices are often weak. When commodity prices are strong, stocks are often weak. The model assumes that gold prices are mildly, but inversely, affected by the S&P 500 Index.
- Gold is real money, unlike the digital and paper debts (“fake-money”) issued by central banks. Gold will rise in “fake-money” units as the banking cartel devalues currency units by issuing ever-increasing quantities of “fake-money.” In many currencies, gold has already reached new all-time highs.
- Gold prices move higher as population adjusted national debt increases. (Dollar devaluation drives all prices higher.)
- Gold prices move higher and lower with crude oil, another commodity.
- Gold prices move opposite to the S&P 500 Index. (Investor preference for commodities versus paper assets.)
- The model weighs and combines these macroeconomic variables to produce a “calculated gold price.” Call it a “fair value” price.
Examine the graph of gold prices and calculated gold prices for nearly five decades. Note that:
- Calculated prices approximately match the annual average of daily gold prices.
- Calculated prices may bottom and rally several years before the paper gold price bottoms and moves upward.
- Calculated annual prices don’t reach gold’s high and low daily prices because daily prices spike too high and crash lower.
- Buying for the long term makes sense when daily gold prices are low compared to the “calculated” price. (Think early 2019.)
- Selling a portion of core positions is sensible when daily prices are well above “calculated” prices, such as in 2011.
Gold Prices in Five Years?
- I don’t know, but almost certainly much higher.
- The model depends upon national debt (will be much higher), crude oil prices (higher in five years—probably) and the S&P 500 Index (flat to higher—maybe).
- National debt will rise rapidly. A 100-year average increase is almost 9% per year, every year. Current economic conditions, no credible spending restraints, “QE to Infinity,” and the coming recession will boost deficits and debt into the stratosphere, even without more wars.
- Crude oil prices rise and fall. They traded below $11 in 1998, reached $147 in 2008, but moved below $30 in 2016. Mid-East tensions and inflationary expectations are rising. It’s reasonable to expect crude oil prices will not fall much from current levels and might rise considerably.
- The S&P 500 has risen from 100 in the 1960s. It is overvalued today and likely to fall, but in the long-term it will rise as dollars are devalued. Assume it corrects and then rises slowly. Remember, the S&P 500 collapsed over 50% after its 2007 high.
“I think the crashing point is where the Scottish economist Peter Millar puts it – where interest on debt starts going exponential and consuming the real economy. In a paper written in 2006 Millar wrote that fiat money systems based on debt require periodic currency devaluations to reduce the burden of interest payments. These devaluations require upward revaluation of the monetary metals and all real assets relative to debt and currency.
“Indeed, the U.S. economists and fund managers Paul Brodsky and Lee Quaintance speculated in 2012 that such a devaluation of currencies and upward revaluation of gold was already the long-term plan of central banks – that they were redistributing world gold reserves to allow countries with excessive U.S. dollar surpluses to hedge themselves against a dollar devaluation. The resulting upward revaluation of gold, Brodsky and Quaintance wrote, would reliquify central banking around the world.”
“In simplest terms, easy money blows up bubbles. Bubbles pop and set off a crisis. Rinse. Wash. Repeat.”
“The economy is loaded up with government, corporate and consumer debt. The stock markets have been juiced to record levels. We also see other asset bubbles in high-yield bonds, housing (again), and commercial real estate, along with a lot of other assets you don’t hear as much about – such as art and comic books.”
“The bottom line is that we can’t “fix” the economy by electing Republicans or Democrats. We can’t put the country on sound economic footing by tweaking this or that policy in Washington D.C. The only way to put the economy on a sound footing is to deal with the root cause of the problem — the Federal Reserve and its constant meddling.”[In the meantime, expect larger deficits and higher gold prices.]
From Groucho Marx:
“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.” [The results include massive deficits, unpayable debt, consumer price inflation and higher gold prices.]
- The model tells us that gold prices were inexpensive for the first five months of 2019 and are slightly undervalued at the end of July 2019.
- Gold prices should rise in the next five years. The model, depending on assumptions for debt increases, crude oil prices and the S&P 500, suggests a fair value of $2,500 to $4,500 in five years. A spike much higher, perhaps to $10,000, is not unlikely.
- Daily prices could double or triple the fair value or fall 10% to 20% below fair value.
- This model is not a prediction or guarantee. It is a valuation model. It could lose accuracy tomorrow, but it has a nearly five-decade history of success.
- Correlation for the annual model since 1971 is 0.97. The R-Squared value is 0.95.
- Buy when the market price is at or lower than the calculated gold price, such as now or after the next correction. Sell when market prices drastically exceed calculated fair value, such as in late 1979, early 1980, and July-August 2011.