In this article, contributor Gary Christenson presents the results of his intense efforts to work out a model for the gold price. This “gold model” is not meant to predict short term gold prices, nor is it intended to act as a target price for investors. The aim of the gold model is to derive a “fair value” for gold in a longer term context, based on a fundamental basis. Such a fair value should act as an objective measure to calculate the deviation with gold’s spot price.
As an example, the gold price crash of 2013 was said by mainstream media and financial pundits to bring the gold price back to “acceptable” levels as gold had been in a bubble. While it was true that the gold price was getting ahead of itself in 2011, it was nowhere near a bubble. The “gold model” from Gary Christenson confirms that the gold price was rising too fast, but it’s fair value was nowhere near the levels of its 2013 bottom.
In that respect, it is interesting to note what several famous bankers have said about the gold price. Consider the following quotes. Paul Volcker once said “Gold is my enemy.” Ben Bernanke recently said “Nodoby really understands gold prices and I don’t pretend to understand them either.” Janet Yellen her recent quote was “I don’t think anybody has a very good model of what makes gold prices go up or down.”
So here you have it, a gold model that has been 98% accurate in the past four decades, worked out by an individual who looked at the fundamentals and the big picture, in an unbiased way. Admittedly, we believe bias is the main issue for bankers.
Gold persistently rallied from 2001 to August 2011. Since then it has fallen rather hard – down nearly 40%. This begs the question: “Did the gold bull market end at the top in August 2011 as many mainstream analysts believe?” OR “Was the decline during the past 2.5 years merely a correction in the ongoing bull market?”
The answer, in my opinion, can be found in my gold pricing model that has accurately replicated AVERAGE gold prices after the noise of politics, news, high frequency trading, and day to day “management” have been purged.
I presented the specifics of my model at the Liberty Mastermind Symposium in Las Vegas on February 22, 2014. A detailed presentation would be much too long for this article so the following is a quick summary.
- Create a simple model of gold prices based on a few macro-economic variables, NOT including the price of gold.
- Each variable must be intuitively sensible in its affect upon the price of gold.
- The results must be graphically similar to actual prices for gold since 1971 and be statistically significant.
- The most obvious macro-economic variable is the currency supply or some proxy for it. Since 1971 the U.S. currency supply has been increased much more rapidly than the underlying economy has grown. Hence the value (purchasing power) of each currency unit (dollars) decreased and prices, on average, have risen considerably.
- Other variables that might be applicable are the CPI, Japanese Yen, real interest rates, dollar index, 30 year T-bond yields, DOW Index, copper prices, national debt, commodity prices, and many more.
- A logical and causal relationship can be established between each of these variables and the value of gold based on either the declining value of the currency, or the changing demand for commodities and hard assets versus the demand for financial assets.
- My model was created, tested, and refined to include only three variables – simplicity makes the model more credible.
- My model attempted to replicate the smoothed annual prices for gold. Smoothing filtered out most of the market noise and clarified what I refer to as an equilibrium or “fair” value for gold.
- My model made NO attempt to predict actual weekly and monthly gold market prices.
- Smoothing was accomplished by using monthly closing prices for gold since 1971, creating a centered 13 month moving average of those prices, averaging January to December monthly prices to create an annual price, and then making a 3 year moving average of those annual prices.
- Smoothing examples: Actual market prices in 1980 went as high as $850 but the smoothed gold price for 1980 was about $460. Actual market prices in December 2013 went to an approximate low of $1,183 but the smoothed gold price for 1980 was about $1,520.
- The calculated Equilibrium Gold Price (EGP) had a correlation of 0.98 with the smoothed gold price from 1971 – 2013. Examine the graph of EGP and Smoothed Gold.
- The model was both simple and robust. It worked effectively, on average, during gold bull and bear markets, stock bull and bear markets, blow-off tops and crashes, volatile oil prices, Y2K and 9-11, QE, Operation Twist, ZIRP, various hot and cold wars, occasional peace, gold leasing, gold manipulations, and high frequency trading distortions in many markets.
- In August of 2011 gold was priced about 30% ABOVE the EGP.
- In December of 2013 gold was priced about 26% BELOW the EGP.
- Smoothed gold prices are shown in a “gold” color.
- Calculated equilibrium gold prices (EGP) are shown in green.
- The long-term trend from 1971 – 1980 was up, from 1980 – 2001 the trend was down, and from 2001 to 2012 the trend was up. (Actual gold market high price was August 2011.)
- Nixon closed the “gold window” in 1971, removed any semblance of gold backing for the dollar, and thereby enabled the creation of significantly more dollars into circulation. The various measures of “money” supply, official national debt, Dow Index, price of gold, many commodities, and most other prices increased exponentially between 1971 and 2013.
FUTURE PRICES FOR GOLD per the EGP Model
- Macro-economic variables continue to increase and decrease as they have for the past 42 years.
- The U.S. economy continues along its typical, but weakened, path with government expenses growing more rapidly than revenues, as they have for decades. National debt rises inevitably.
- Congress continues its multi-decade habit of borrowing and spending, talking about change, and changing little. The Fed supports the stock and bond markets and continues “liquidity injections” as it deems appropriate to benefit the 1%.
- Monetary, political, and fiscal policies will NOT be materially different from what they have been during the past 42 years.
- The U.S. will NOT be subjected to global nuclear war, Weimar hyperinflation, or an economic collapse, while we will continue to be subjected to the same Keynesian economic nonsense that has created many of our current “challenges.”
Given the above assumptions, a reasonable projection for the EGP (a “fair” price for gold) in 2017 is $2,400 – $2,900. Remembering that market prices can spike significantly above or crash below the EGP for many months, we could see a spike high above $3,500 or $4,000 in 2017. Extraordinary events such as a global war or dollar melt-down could push prices higher and sooner.
I plan to publish the details of this model, including variables, graphs, analysis, and the calculation formula in a paperback book.
Until then you may find value in these articles:
Bill Holter Jim Sinclair in Austin, Texas
Eric Sprott Do Western Central Banks Have Any Gold Left?
Gold Silver Worlds Jim Rickards: Target Gold Price
Casey Research 23 Reasons to Be Bullish on Gold
The DI Gold Investors: Take the Red Pill
Jim Sinclair www.jsmineset.com