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Posts Tagged ‘Gold Prices’
Gold vs. U.S. Debt
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I received an interesting piece of data this morning so I thought I would share it. The spreadsheet ultimately compares government debt with the amount of reserves in gold we have in the U.S. Treasury. The amount of gold owned by the treasury has remained constant for many years at 261,498,899.32 ounces. The really interesting figure is how much the price of gold would have to be per ounce in order to monetize the debt.
In 1980 the total amount of liquidity in the market was $1.4 trillion (that includes government debt, NYSE Market Cap, Corporate Bonds and M1) of that number the government debt total was roughly $80 billion. The 1980 high close on the spot price of gold at the time was $825 per ounce. If the government was to monetize the debt (pay it off) with gold in 1980 it would have only needed to do that at $297.90 per ounce. So in terms of gold to debt ratios, spot gold was overvalued at the $825 closing high.
In 1989 the total amount of liquidity in the market was $3.12 trillion, of that number the government debt total was roughly $144 billion. The spot price of gold at the time was $416 per ounce. If the government was to monetize the debt with gold in 1989 it would have needed to do that at $553.35 per ounce. So in terms of gold to debt ratios, spot gold was slightly undervalued.
In January 2010 the total amount of liquidity in the market is $25.8 trillion, of that number the government debt was roughly $12.4 trillion and rapidly growing. The spot price of gold is currently $1,110 per ounce. If the government was to monetize the debt with gold today, the spot price would need to be an amazing $47,239!
Since we know that wealth never disappears, it merely shifts location. And we also know that, so far in this trend that when investors have become nervous about cash they have shifted their wealth from cash, to stocks or bonds. When they get nervous about stocks they shift to bonds or cash. When they get nervous about bonds they shift to cash or stocks. Therefore, so far in this trend cycle, when investors get nervous they have been shifting from paper to paper. We also know historically, that ultimately this will change and the flight to safety will be to hard currency assets ie. Gold and Silver.
Number one, look at the amount of increased liquidity (money) in the market over the last 30 years, from $1.4 trillion to $25.8 trillion. That is a lot of money. I am not suggesting that all of that wealth will shift this way since it is most likely that once the flight picks up enough steam, those currently liquid markets will most likely become illiquid. But if the 80/20 rule applies that would be $5.16 trillion shifting in the physical metal direction. Almost twice the entire market cap in 1989! And remember, we’ve not taken into account all of the markets, just those four. Number two look at how much the debt has increased, we are in deep trouble here with no signs of stopping. Keep in mind that this number doesn’t include Social Security or Medicare which experts estimate to bring the debt to somewhere between $55 and $80 trillion and growing! And that debt must be addressed one way or another. Lastly look at the fact that if the government was going to monetize the debt with gold they would likely need to confiscate bullion in order to have a more meaningful total number of ounces since the government holdings have never been audited and studies done by GATA suggest we actually hold far less than what we say we have.
Since all the gold that has ever been mined is only 161,000 tons and fits into two Olympic sized swimming pools. You can guess the impact on gold if this $5.16 trillion wall of wealth shifts into physical metals. And since the physical metal has already begun to become scarce on the markets as the 2nd tier wealth began to shift from paper gold (ETF’s and stocks) into the physical. This would likely send rare gold coins to new heights as money would flow into this asset class.
Interest Rates vs. Gold, Stocks and Real Estate
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If we look at history we can draw some interesting conclusions from interest rate cycles and how they affect the gold, stock and real estate markets. Typically when interest rates are on the rise gold tends to rise with it and vice versa. Typically when rates are falling stocks and real estate rise and vice versa.
For example, interest rates rose from 1.75% in 1965 to a peak of 15% in 1980. During that same time frame gold went from $35 per ounce to a peak of $850 per ounce. That is a 2,300% increase. During that same time frame the DJIA was stagnant, from 856 in 1965 to 857 in 1982.
From there rates fell from 15% to where they are today at 0-.25%, which created an historic bull market in stocks, with the DJIA at 857 in 1982 to 11,722 in 2000. The historically low interest rate environment started in 2002 just after 9/11 and continued to fuel the stock market up to 14,100 in 2007. During this historically low interest rate environment the real estate market boom ensued. This created a huge bubble which has long since burst and is continuing to do so. The reasons why low rates create stock and real estate market booms is due to increased liquidity. In addition more real estate can be purchased with lower rates, and stocks increase with investment capital inflows when not competing with higher rates on other investments. While interest rates were falling so was the price of gold, which went from $850 in 1980 to $252 in 1999.
So what does all of this mean to gold prices in the future? Well if history repeats itself and gold rises during times of rising interest rates, then one must ask themselves only one question: are rates going higher in the future? I believe rates will have to come off of their historic lows; in fact they only have one way to go since they are at 0% right now. When the economy does start to recover the Fed will have to raise rates in order to slow the flood of cheap money in order to battle inflation.
Why has gold risen during this low interest rate environment? This is due to short-term world economic problems, with people and institutions seeking safe haven from the dollar and other fiat currencies. Thus the demand has increased while supplies are diminishing and worldwide output is slowing down. People worldwide are buying gold bullion and rare gold coins for preservation of capital and growth.
Rob McEwen comes out with his Projections on the Gold Market
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Rob McEwen, Chairman and CEO of U.S. Gold and founder and former CEO of Gold Corp the second largest gold producer in the world was interviewed by Bloomberg on January 12th 2009. He has been on the record since March of 2006 saying that gold will reach $2,000 per ounce by the end of 2010. He also states that he believes that gold will hit $5,000 per ounce somewhere between 2012 and 2015.
He sites as his reason for this rapid run up in the price of gold will be due to the governments around the world printing money at a high rate. Mr. McEwen thought that the bull market would have ended by now, but people are starting to see gold as money, a currency that trumps all others. This new demand has fueled the fire further than he thought it would. He is so strong on gold rising that he advises that gold mining companies do not hedge.
In my opinion, Rob McEwen could be right. Gold is in a bull market, and typically bull markets end with a blow-off top in the third phase. We have not seen that third phase yet, so we could see very sharp and dramatic price increases during that time frame. It is undeniable at this point that the U.S. Government is printing money at an alarming rate. Some experts speculate that they have doubled the money supply in under a year’s time. Anytime money printing is done in this fashion it puts extreme pressure on inflation which in turn puts upward pressure on gold. Look at what gold did in the 1970’s, when inflation was running high, gold grew from $35 per ounce to $850 per ounce.
All assets run in cycles so we very well could see gold hit $2,000 per ounce this year. I think it will depend on how the economy performs this year and how much confidence is instilled in the American people. Many have said that the hole has been dug and that the dollar will ultimately collapse like all other fiat paper currencies have. If that is the case gold could go much higher than even $5,000 per ounce. But let’s hope that doesn’t happen, because if it does we are in a lot more trouble than any of us want to be.
Is there a Current Floor to the Gold Price?
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Gold has been of value for over 5,000 years. Civilizations have risen and fallen, currencies have come and gone and yet gold still is coveted by people all around the world. Gold has never been worthless! It has always had some value to it; therefore it is different than most other asset classes. Stocks, bonds and paper currencies for example can all become worthless at some point.
But is there a floor under the price of gold? The simple answer is no. I am assuming that this question is pertaining to the government. Neither the U.S. Government, nor any other government has a floor price on gold. A floor price being the minimum a person or institution has to charge for it, or the lowest possible dollar amount it can fall to. Gold can free float as high or as low as the market’s action will allow. So the price is determined primarily by supply and demand. But there are technical tools that can help us understand the price action of gold.
This leads me to believe the question is this: what is the current support level on the price of gold? Most assets trade between support on the bottom and resistance on the top. These two figures are determined by previous market action. When an asset breaks a resistance level, that figure then becomes the new support level. The current support level on gold is $1,017 which was the last resistance level. The resistance level at the top is $1,218. Gold has not tested that level since it was set in December of 2009. In addition, recently gold has had difficulty breaking $1,045 on the bottom (the price at which India bought 200 metric tonnes from the IMF) and the $1,120 mark on the top. So I am calling $1,045 to $1,120 a smaller trading range within the technical trading range.
Should gold go below $1,045, look for it to test the $1,017 level. If gold breaks the $1,120 level on the top look for it to test the $1,218 mark. If gold should break the $1,218 level that would then be the new support level with the new resistance level being unknown because it has never been higher. If gold should break the $1,017 support level that would then become the new resistance level and the next support level would be around $1,000.
Technical language can be confusing, so if I have done so I apologize. In the simplest form, the current support level is $1,017 and the current resistance level is $1,218.
Gold Price Gains and Losses over the Last 3 Months
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The price action on gold has been hot lately. Gold closed at an all-time high on December 2nd of $1,212.50 per ounce. The price action prior to that was climbing almost daily from the $1,050 mark. After it reached the high of $1,212.50 it slowly made its way down to test the $1,050 support level. It came close to this support level but never broke it. It closed at around $1,058 on February 5th and since then has steadily climbed to where it sits today of $1,112.
The up and down market action can be scary for your average investor. This is why I always say, if you are not a day trader then you do not need to pay attention to the daily market action. What you are looking for are trends in the market. Trends are what tell you what to do in the long-term. Trends should guide your strategy. If you look at a chart of gold from 2000 to present you can see a long-term positive trend. It started at $252 per ounce and has been climbing ever since. Sure there have been some big corrections along the way, buy that is what you want. Ups and downs are a sign of a healthy market. If you were watching the daily market action you might have sold out too early. This is why trends are so important.
Take March of 2008 to November of 2008 for example. Gold rose to an all-time high of over $1,000 per ounce and steadily fell to $709 per ounce. Had you have sold out because of the downward slide, you would have missed out on the following upswing. As for the current trend, everything is pointing towards a continuation of the upward trend. Two of the biggest factors playing into the future of the gold market are the U.S. Dollar and normal bull market cycles.
The dollar has been in a steady demise for a few years now, and with all of the money printing going on with the U.S. government I don’t think it will be going strong anytime soon. I have written many times in this blog about the three phases of a bull market which I think is also a big factor contributing to the positive trend in gold. Many experts are calling for gold to hit $2,000 per ounce this year and $4,000 to $5,000 per ounce before the trend is over.
Cost of Gold
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The cost of gold is rising, and has been for the last 10 years consistently. This action confirms the current gold bull market (see the previous blog for 10 year spot chart). For individual buyers the cost of gold differentiates depending on what type of gold you buy. Whether you buy gold bullion coins or bars, or rare gold coins, these prices will vary greatly.
Currently the spot price of gold is at $1,175 per ounce. According to many experts this is a great value, because they believe gold will hit $2,000 per ounce this year. The spot price of gold is an indicator value, like crude oil is to gasoline, spot gold is to physical gold. Therefore the cost you pay for physical gold will be the spot price plus a premium. Typically the premium will be anywhere from $50 to $150 above the spot price.
Gold bullion coins cost more than gold bullion bars, due to manufacturing costs. Coins are struck multiple times and treated with more care than gold bars. Therefore if you are looking for the cheapest costing gold you should buy gold bars.
Rare gold coins cost more than bullion coins and bars. This type of gold can range in price from a few hundred dollars more than a bullion coin to seven figures. This is due to the rarity and quality of a particular coin. The more common and the lower the grade of a coin the lower the cost, the higher the grade and the rarer the coin, the higher the cost. This type of gold has benefits that extend beyond what bullion can provide. While rare gold coins have these added benefits they still have the intrinsic value of the gold itself, and history has shown that the value of gold has never been zero.
Figure out your goals and objectives, and then acquire the right type of gold to support those goals. The cost will vary, but this should not matter. It is more important to acquire the right type for you then to buy the cheapest gold.
Can Gold Ride out the Financial Storm
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Gold bullion and rare gold coins is the perfect instrument for riding out any financial storm. Global debt crisis, banking failures, over printing of money/collapse of the dollar, inflation/hyperinflation, turmoil in stock markets are a few examples of when gold shines. Gold has been valuable to human being for over 5,000 years. Currencies have come and gone, civilizations have fallen and technology has advanced and throughout all of it gold has proven to retain its worth.
The main reason people buy gold is to diversify their portfolio against downturns in paper assets. For example, when the collapse of many big banks in the U.S. occurred at the end of 2008, gold went from around $725 per ounce to close to $925 per ounce, a 27% increase. In 1987 when the stock market crashed, the infamous Black Monday, gold shot up to $500 per ounce, which was the highest level since 1983.
Gold bullion is primarily a hedge against inflation. In 1910 one ounce of gold could buy roughly 222 loaves of bread. Today that same one ounce of gold can buy roughly 275 loaves of bread. The dollar however has lost 95% of its purchasing power. If you owned $100 worth of gold in 1910 (5 oz) it would be worth roughly $5,500 today. In comparison, if you had $100 dollars in 1910 it would be worth roughly $5 today. That is a pretty big difference.
There have been many financial and global crises over history, and yet gold has always survived as a safe haven. Therefore don’t you think that as we continue to go through this global financial crisis gold will continue to be a safe haven for your dollars?
On a side note, look at the chart below, for the last 10 years gold has been in a positive trend cycle. Does this look like a bubble formation? Absolutely not! It has accumulated approximately 17% per year, building support and resistance all along the way.
What to Buy, Gold Coins or Gold Bars
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A very common question is always what form of gold should I buy. Before you can answer this question you must understand the different types of gold you can own (click on bullion in the next sentance and rare gold coins in the last paragraph to read about them first). You can buy gold bullion or you can buy rare gold coins. If you are convinced that bullion is the way to go then, in my opinion, you should buy the cheapest possible option available. That can change depending on supply and demand.
Bullion coins come in many possible options. They vary in country of origin and in size. Depending on market conditions one particular coin can be more readily available than another. For example, there have been times recently that American Eagles were very sought after and commanded a higher price than the Canadian Maple Leaf. Both represent one full ounce of gold, but because of supply and demand issues one cost more than the other.
Coins typically cost more to produce than bars. Therefore a bar of gold is typically cheaper to purchase than a coin of the same number of ounces. In addition, if you purchase a large number of ounces at a time (typically 50 or more) you get a price break. This works for coins or bars. If you are looking for the absolute cheapest way to own gold, then bars in larger ounce sizes are for you. If you are looking for something to barter with in the event of a dollar collapse, then coins of the smallest sizes are for you. If you are looking for beauty in addition to owning gold, then proof one ounce coins are for you.
This brings us to rare gold coins. Many rare gold coin owners acquire U.S. rare gold coins minted prior to 1933. They are minted in identical ounce sizes as American Eagles; however these coins offer many advantages above and beyond their bullion content. Advantages like privacy, exclusion from previous gold confiscations and performance over bullion gold make this form of gold the best way to own gold in many peoples’ eyes. If you are looking for beauty, privacy, historical significance and long-term performance, then this type of gold is for you. They are more expensive than gold bullion due to their performance over history, and depending on how rare a particular coin is, it can be worth millions. When buying this type of gold coin, you are buying more than just the gold content.
Gold Outlook for 2010
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At the beginning of every year the “experts” come out with their predictions on the precious metals market. These predictions vary every year in their overall gold price target and timing, and should be taken as an estimate, a guide for your strategy. Never the less what is being predicted for 2010 is very exciting for those who own gold or may consider to buy gold coins this year.
James Turk
James Turk is well known for his predictions in the precious metals market. Since the 1970’s people have followed him religiously, in order to guide their decisions in the gold market. Mr. Turk got the price target for 2009 correct. He stated that gold would break $1,000 per ounce and hold above it into 2010. He is calling for gold to break $2,000 per ounce in 2010. The timing is not clear, just that it will break $2,000 this year. He also calls for a floor under gold of $1,050 per ounce, which is the price at which India bought 200 metric tonnes from the IMF at. He also states that we are in the second phase of a three phase bull market.
Rob McEwen
Rob McEwen is the chairman and CEO of U.S. Gold, a gold mining company. He was recently seen on Bloomberg and stated that he believes that gold will go to $2,000 per ounce this year and that it will go to $5,000 per ounce between 2012 and 2014. He states that this is due to the U.S. government printing dollars at an alarming rate and a lack of supply to meet worldwide demand.
Frank Holmes
Frank Holmes is the CEO of U.S. Global Investors. He states on Market Watch, that gold could break $2,300 per ounce which is its inflation adjusted high of $850 per ounce in 1980. He believes that this will be due to a shrinking supply of gold and worldwide inflationary pressures. He does not say exactly when this will occur, but that he believes that it will occur.
There are many more predictions that you can find if you search for them. Even Merrill Lynch is predicting higher gold prices for 2010. This is encouraging news for those that own gold or are considering entering the market today. If someone bought gold today at $1,133 per ounce and it went to $2,000 an ounce by the end of 2010, that would be an increase of 76%!
Rare Gold Coins Outperform Gold Bullion
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Gold has been in a positive trend since 1999. We have seen gold come from $252 per ounce in 1999 to as high as $1,225 per ounce at the end of 2009. Over that 10 year period is a 386% gain. Over an even longer period of time we have seen gold come from $35 per ounce in 1970 to that same $1,225 mark in 2009. That is a 3,400% increase! But what have rare gold coins done over that same time frame?
According to PCGS, Mint State Rare Gold Coins have performed even better that gold bullion since 1970. On their site, a $1,000 acquisition of mint state rare gold coins in 1970 would be worth $114,489 today. That is an 11,348% increase! That means that rare gold coins have outperformed gold bullion close to 4 to 1 over the past 40 years.
There are a few factors as to why this has occurred. Gold bullion only has the value of the gold content itself. If you own a 1 ounce gold bullion coin, like an American Eagle, then it is worth 1 ounce of gold. Rare gold coins also posses the intrinsic value of gold. A $20 Liberty minted between 1849 and 1907 contains one ounce of gold, so therefore it will never be worth less than the gold content itself. However, rare gold coins also have value do to their quality and rarity. However, the main factor that contributes to their value is supply and demand forces. No one can mint coins prior to 1933, therefore supply is limited. As demand heats up, supply becomes tighter and the value goes up. Gold bullion is being mined everyday, therefore supplies are constantly increasing.
Quality and rarity of any particular coin play a large role in its specific value. The higher the quality the more valuable it will be. The same goes for rarity, the more scarce a coin is the more valuable it will be. Rarity is easily determined. PCGS keeps a population count for every coin ever minted in the U.S. in every grade. PCGS has also made grading simple. PCGS and NGC grade coins on a scale from 1-70, 70 being perfect condition. Where you find the performance is in the mint state category, which runs from 60 to 70.
You can see that if you have a high grade mixed in addition to a very rare coin the value would be very high compared to a coin that is of a lower grade and rarity. In fact one coin, the 1933 $20 Saint Gaudens, which was at the time considered to be the only one in existence, sold at auction for $7.5 million. Values range from a few thousand dollars per coin up to that amazing $7.5 million value. Buy rare gold coins.
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