Monetary Metals Brief 2015
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.
Thanks Keith. There is a guy writing on Seeking Alpha by the name of Ben Lockhart who has a very similar view. He sees new lows ahead in the short term, but an end to the bear in 2015 and the new bull market being kickstarted when bond markets start to crack and money comes rushing out needing a new home. Latest article here:
Until the debt markets become riskier for want of a better word, gold is not attractive to big money – the kind of buyers who could cause a steady rise, rather than speculators driving up prices short term. Makes sense to me.
A very happy new year to you Keith – thanks for all the great commentary. I never miss a one.
You explain and state clearly the one simple and primary reason to hold precious metals. It is a practical matter to hold insurance and, as is the case with other assets, one can be under or over insured but we strive to have it about right.
For the most part no one gets it when it comes to monitory assets.
Thanks, Keith. Always find your analysis interesting. Keep it up!
Hi Keith, I very much enjoy reading your piece. It is logical and thought provoking.
I have been invested in PM’s since 1999, so I have seen the highs and lows.
My only exception to your well crafted ideas is the notion that gold prices are not manipulated.
We know that interest rates and fiat currencies are manipulated.
It isn’t much of a stretch to assume that PM’s are too.
Keep up the great writing and keep challenging our belief systems!
I agree with your assessment of probable Gold and Silver price manipulation. It seems to me that once you are manipulating the interest rate of the world’s “reserve currency”, you are manipulating all markets.
Here’s a little rant of mine(with sarcasm at the end) about what Paper Money has received over time…
1) Executive Order 6102 making gold outright illegal. What did Gold do to those guys, or anyone, that they wanted to make it illegal? What happened to Article 1 Section 10 of the Constitution?
2) Same for Silver with Executive Order 11110.
3) Another Executive Order to cut the last tie to Gold by President Nixon in August of 1971. Nothing wrong with Executive Orders apparently.
4) Copper removed too. Pennies are now zinc-filled.
5) Repeal of the Glass-Stegall Act
6) Proclamation of being TBTF, and then got T.A.R.P.
8) Operation Twist
11) The Debt Ceiling gets raised time immemorial.
But there is NO MANIPULATION of Gold and Silver Prices!!
I want to add something that I forgot. Something that I have a great deal of trouble reconciling when it comes to whether or not there is manipulation of Gold and Silver prices, especially the dollar price.
Official U.S. Gov’t Price: $42.22/ozt.
Price I have to pay to get one: ~$1,300/ozt. (spot+premium)
For me, that does not compute.
It’s not unusual for an asset to be on the books at its acquisition price. That is what the Law of Assets prescribes, proposed, as I understand it, by the man who discovered double entry accounting Luca Pacioli. An asset should be on the books at the lower of: (a) the acquisition price or (b) current market price.
Thank you Keith. That does make sense.
As to the matter of insurance, could you please do a piece on the question of government “confiscation” of both gold and silver? Insurance has no value if the rules are changed to negate it. This is the same as buying an insurance policy from a company that becomes insolvent when required to perform. I know this can be considered a “tin hat” issue, but in fact the rules were changed in the 30’s and some laws, including the Patriot Acts and Obamacare, make it more confusing and less clear.
Please tell us your solutions to creating “safety through PM’s” that takes into account an oppressive governmental posture on this issue.
Thanks as always,
Extrapolating “past trends” into the future is a guaranteed formula for financial disaster, and the fact you’ve fallen into this trap makes it clear you’re someone who was unfortunately educated beyond the limits of your intelligence. Good luck to you, you’re going to need it.
I hope you see Keith’s reply to you below. As he says, you must not have read the article. You must have read just the first couple of sentences and then stopped there. You have to read further, if not the entire thing.
Thanks for the comments.
Music: the gold price could move sharply simply if the existing owners lose interest in selling it.
robnuez: In a sense, the price of gold (and everything else) is manipulated. The interest rate has been unnaturally falling for 34 years. People are trained to think in dollars and gold is just a risky commodity. Whenever you meet someone who scoffs at gold, he’s been manipulated by government schools, the tax code, the media, etc. to reject gold. In that sense, the market value of gold is lower than it would be. Not because of naked short selling of futures.
rpmartin: If the government sends jackbooted thugs to every home, bashing in doors and heads to take every ounce of gold they can steal… there’s not much protection. Those with acreage could at least bury it somewhere and hide it… I did write a piece last year (it’s on this site) about FDR’s gold confiscation. His reasons are not applicable today, for what that may be worth.
ManAbout: I take it you stopped reading before the part where it was clear that I set up a straw man argument?
My views on reasons to own PM’s have changed somewhat over the last few years. I used to think of them as an investment / speculation with the added benefit of insurance against inflation and/or collapse of the financial system. My thinking has now evolved toward thinking that the main reason is what used to be my added benefit (insurance).
Whether due to manipulation by TPTB or from normal market forces, the bottom line is that the prices in dollars have fallen significantly over a fairly long period of time.
It seems that in order for the downward trend to reverse itself there will have to be some sort of major financial calamity that causes people to once again seek the safe-haven of owning PM’s. That’s where the catch-22 situation comes in. Do you root for that financial calamity? The effects of a financial meltdown could be devastating & drastically change everyone’s life. I can’t picture a smooth transition to whatever comes next.
On the other hand, if things continue on their present course with no major financial catastrophes, then it seems as though the PM prices will eventually bottom out and stabilize at somewhere near the cost of getting them out of the ground.
Could they go up without a major financial meltdown? Sure, but it just doesn’t seem likely.