Gold Market

Discussion in 'Commodity Futures' started by gartley222, Nov 9, 2003.

  1. :D I was looking to talk about the gold market and how it has been rising so much. I have been studying it for a few years now and it seems to be the best place to put money in at the moment. If anyone is into the bullish gold market as well please feel free to contact me with questions, perspectives,knowledge and good chit chat as well. I also have work to share if anyone is interested.
  2. Check our existing thread on NXG. There is good info there.
  3. I did some work looking into gold.

    I must say that the more I dig into gold, the more I feel that the gold story is more complicated than most people make it out to be.

    Gold has a diminishing role to play in the future monetary arena, that much is certain, so it is difficult to make a long term bullish argument for gold.

    However it does have a strong put floor as an asset of last resort, esp with recent instituitional memory of LTCM, Russian debt crisis, asian currency crisis and NASDAQ bubble crash.

    So my personal thesis is gold at $450 is quite possible, given that we are trading out of a 20 year bear market that bottomed out around $250. That would be nearly a double.

    Gold at $600 is unlikely. There is too much of a gold supply overhang at the CB level (the Europeans have demonstrably less and less interest in holding gold as time passes, and unless Chinese and Japanese banks want to rotate out of T bills and into gold bullion, that will put a price cap on the market).

    There are abt 140,000 tons of gold in the world. At $380/oz, that's $12.16MM per ton or $1700 BN for 140,000 tons.

    In the US alone, mutual funds control $6500BN, hedge funds $500BN. If an additional 1% of assets are switched into gold, that's $70BN of liquidity into the gold market. ("Experts" all talk about a 2-3% allocation of gold in a portfolio. Assuming that the national portfolio is at about 1%, an additional 1% investment seems a reasonable estimate.)

    The rest of the world has a tiny mutual fund industry by comparison (Japan is abt $400bn?). If I put a wild guess of $1000BN for instutional assets of the rest of the world, a 1% shift into gold would constitute $10BN.

    Let's also add the India argument. India has a GDP of $2660BN. If 1% of India's GDP is diverted towards buying gold, you will pour in an additional $27BN.

    In this highly optimistic scenario, that's $70BN from the US, $10BN from the rest of the world and $27BN from India flowing into the gold markets for a grand total of abt $100BN.

    100/1700 = 5.9%. So all of that liquidity will drive up the price of gold by 5.9% or $22.42 assuming a current price of $380/oz, which gets us to abt $400/oz.

    Perhaps some speculative fever might cause prices to overshoot by 15%, which gets us to $460 ($400 x 1.15).

    Basically, I don't see gold at $800 and I don't entirely buy the James Turk argument on M3 and gold. There is a hidden assumption that gold is as important today as it was in 1950, and deserves to maintain a fixed exchange ratio with dollars.

    70% of the world's gold serves a monetary function, only 30% serves a industrial or commerical function. Therefore the value of gold to the world is largely determined by how much the world needs gold as money. If the world starts to shun gold as money, then gold is not so useful anymore and the ratio of gold to dollars must permanently decline.

    Anyway, that's a long winded way of saying that the Central Banks hold the key to the future of gold. If they decide that they want to keep holding on to gold, then the price of gold could go through the roof since all that $100BN will have to chase down private gold. If the CBs decide that they are happy selling into buying strength, then gold will not see a price higher than $450, or possibly even $400.

    The producers, the mines, you and me are just bit players in this market.

    Now of course, I'm just providing a liquidity analysis. The public could get whipped up into a frenzy and start a gold bubble :)
  4. That is definitely the truth. The Blanchard v. JPM suit is going to discovery-- I think we'll have an even deeper understanding of how complicated it is soon.

    I'm not so sure that it is certain. Witness the popularity of the gold dinar. It's a store of value that doesn't depend on nation-states for its legitimacy. Depending on the way the big cookie crumbles, that could be really important.

    I like your liquidity analysis- it's a good example of 'middle-of-the-road' thinking on the gold market. There are definitely extremists in both bull and bear camps.

    Only a couple of things you might like to think about:

    1. Gold equity mutual funds-- Most gold miners have reasonably fixed costs of production (I don't know what the average is across the industry)-- until gold passed $350, most of them were underwater, and thus their earnings were negative. The earnings of those gold companies will go up faster than the price of gold itself, resulting in p/e expansion.

    2. The hard-core pro golders maintain that the numbers on CB gold holdings are way off, due to unbooked swaps and lease arrangements. In fact, the IMF has some strange reporting requirements wrt gold holdings that can make them look larger than they are.

    3. The hardcore progolders also argue that the big 5 banks have leased these still-on-the-books CB gold holdings, sold the gold into the market, and then put the proceeds into treasuries or other vehicles, capturing the spread between gold lease rates and interest rates. By their calculations, the total short position in physical is somewhere near 15k tonnes, not the 5k commonly reported.

    This is so much gold that trying to get out of their shorts will drive the price of gold far past $450. There's just not enough available physical.

    I buy their arguments wrt the above, but I'm more prone to conspiracy theory than most.

  5. To this point ,the bulk of the momentum in the precious metals sector has been generated by mutual funds as a hedge to counter potential losses by a depreciating dollar and dollar denominated assets.Considering the abundent supply of cheap cash,the feds willingness to increase and continually cheapen that supply,golds advance will continue.How high it will go is anyones guess .I'm not sure that it will break the old $850 high,but I agree with the students assessment ,that when gold terminates its bull run it will probably settle out in a sustainable range between $350-$500.However, with a moderately higher gold price, institutional investors could push gold related assets substatially higher because of the mountain of available liquidity.Keep in mind,that 40% of US securities are foreign owned.I dont think its realistic to think that foreign holders of the dollar are just going sit back and take it in the shorts to the tune of 30% plus, without taking counter measures.
  6. yabz


    e-gold is another one. Its been around since 1996 and now has around $19 million of reserves.
  7. I'm aware of e-gold and e-dinar (and i wish they'd get even more popular), but I was actually talking about a push ot use gold dinar (but not the e-version) as a unit of account for inter-islamic global trade.

    Best Regards,
  8. Terrorist Network alert! Terrorist Network alert! Terrorist Network alert!

    :) :) :)

    But seriously, gold is a much favoured form of money by the illegal economy. I think the WSJ ran an article a while ago abt drug dealers in the US who cast power drills and hammers out of gold to send back to Columbia as "machine parts" exports!

    Diamonds from the congo, gold from the arab souks and dollars from the US Federal Reserve - that's the currency of the underworld :)
  9. Thanks for the good thoughts Laz (and Hollywood!)

    Got some replies here. (as I try to flip my gold futures ... take my offer dammit)

    I think physical production is in the 2000 tonnes to 3000 tonnes range, call it 2500 tonnes.

    Clearly as price increases, so will production - in that regard, gold behaves like a traditional commodity.

    If producers sell forward an average of 4 years worth of gold, that gets us to 10,000 tonnes short at any one point in the mkt. That rolls every year based on production forecasts. Short of a permanent change in producer hedging strategy, that 10,000 tonnes of short interest is probably structural and does not behave in the same way as equity short interest.

    It has no price impact IMHO, unless producers reduce demand for hedges, in which case the gold lease rate will go down and price of gold MAY go up.

    Now, CBs hold abt 32,000 tonnes, so there is enough borrow to facilitate the shorts.

    (good document on gold hedging prepared by a Barrick exec for industry use :

    And above and beyond providing borrow on gold, the CBs are still selling in 2003 at an annual rate of abt 600 tonnes, of which Switzerland makes up approx 50%. (Not all of it is physical, so this is a rough estimate) Nov 03.pdf

    If the Swiss don't want to hold gold .... that makes me nervous. (Here's a Swiss central banker's views on gold - no question abt it, the Swiss take a trader's view on gold)

    I'd let the BIS have the last word on gold - dated march 2003

    Hope this was informative. The links have some quality information IMHO - there is too much disinformation on the web when it comes to gold :)
  10. yabz


    Click here to help that process
    #10     Nov 11, 2003