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Chronically Low Gold Price Forecasts

IMG Auteur
Published : December 05th, 2012
670 words - Reading time : 1 - 2 minutes
( 6 votes, 4.2/5 ) , 1 commentary
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The chart displayed below was taken from a recent article at The Daily Reckoning and shows the median gold price forecasts of analysts monitored by Bloomberg. It shows that from 2007 onwards the average forecast has been for the gold price to be flat or higher over the coming 1-2 years and to then decline sharply such that the price is much lower after 4-5 years. For example, in 2007 the average forecast was for the gold price to trade at $650-$700 during the current year, move up to $750-$800 during 2008, and then decline to below $600 by 2012. They have always expected the price to be lower in 4 years than it is today. Despite being consistently wrong, they still expect the price to be lower in 4 years than it is today.

This is absolutely not the sort of sentiment that would likely be evident if gold's long-term bull market were near its end. There's a high probability, verging on a certainty, that near the end of gold's bull market the average analyst will be forecasting an upward price-trend extending many years into the future.

On a different matter, the article linked above contains some serious errors. One notable error is the assertion that China and India account for 47% of the demand for gold. To make this assertion you have to make the mistake of applying a traditional commodity-type analysis to the gold market.

With all commodities except gold the so-called stocks-to-flow ratio is relatively low, meaning that the amount of the commodity held in inventory (warehouses, storage containers, vaults, etc.) is low compared to the amount consumed in commercial processes. It is almost always less than one year and is often just a few weeks. This means that when doing a supply-demand analysis for any commodity except gold it will generally make sense to compare the current year's consumption to the current year's new production. With gold, however, the existing aboveground supply is more than 75-times greater than annual mine production. This means that if the entire gold mining industry were to shut down for a year it would not make a significant difference to total gold supply. It also means that it makes no sense to compare the amount of gold sold in a country in a year with the world's new mine supply and to use the result of this comparison as an indicator of that country's contribution to global gold demand.

A related error is to downplay the actions of the Fed. The US$ gold price is mostly determined by the general perception of what's happening and what's likely to happen to the US$, which, in turn, is mostly determined by the actions of the Fed. For example, a negative real interest rate constitutes a powerful bullish force in the gold market, but real interest rates in the US could not be negative in the absence of the Fed.

Gold is a global market and what happens to gold demand in one part of the world can have an effect on how gold is priced in another part of the world, but gold is never going to make large and sustainable gains relative to a sound currency. If, for example, the US$ were suddenly transformed into a sound currency due to the Fed making a credible promise not to further inflate the US$ supply, we have no doubt that the US$ gold price would decline to a much lower level regardless of what was happening in China and India. In this hypothetical situation the gold price would decline in US$ terms, but it wouldn't necessarily decline in terms of any other currency.

The main reason to be bullish on the US$ gold price is that the ignoramuses at the upper echelons of the Fed truly believe that they can help the US economy by conjuring money out of nothing. The weaker the economy becomes the more money they will create, and the more money they create the weaker the economy will become.



Data and Statistics for these countries : China | India | All
Gold and Silver Prices for these countries : China | India | All
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The low gold prices predicted by Bloomberg Median Analysts based on a four year cycle appear to be far off the mark for the simple reason that after 2009, due to the decaying and uncertain monetary system the value of gold's worth as a saviour and measur  Read more
Papli - 12/6/2012 at 11:58 PM GMT
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The low gold prices predicted by Bloomberg Median Analysts based on a four year cycle appear to be far off the mark for the simple reason that after 2009, due to the decaying and uncertain monetary system the value of gold's worth as a saviour and measure of value vis a vis the dollar has got elevated manifold. Today the central banks including of emerging economies are accumulating and adding gold to their reserves. Between 2011 and 2012 all nations central banks have added gold to their holdings. This includes countries like France, UK, Greece, Venezuela, USA and Portugal who were already holding gold in excess of 70% as percentage of their reserves. And don't discount the Chinese who are the largest producers but don't allow their gold to move out, in fact are looking for mining opportunities in South Africa, Canada, Australia and possibly in Mangolia and Colombia. Indians hold approximately 20000 tons of unaccounted gold that is more than the holdings of a few leading Central bank holdings put together. Gold at $ 1300 in 2015 looks to me improbable if not impossible. Gold will provide the smooth sailing from one monetary system to another when that occurs. History bears testimony to this and it has an uncanny habit of repeating itself. So be advised.
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