The Price of Gold – Current Expectations
There are many pundits that believe that gold will continue its relentless drive upward. Expectations range from a projection of $2,100 by December 31, 2012 to $5,000 per ounce. If one listens to these expectations, it sounds inevitable that gold will continue it’s rise to unprecedented heights.
Comparison to a Expectation in the 1980′s
Those with long memories, will remember the expectation of $2,000 gold in the 1980′s when gold rose relentlessly to peak at $800+ / oz. Yet the fall then was even quicker and more dramatic than the rise. After its dramatic rise in value, gold fell even more dramatically and stayed in the doldrums at a depressed price for many years.
Examining the Price of Gold Through Technicals
Charting and technicals are a very interesting way to project the future value of anything traded. In Gold’s case, technical indicators are quite illustrative. The rise on the charts since the year 2005 has been in a steady upward trend until 2008, when a similar chart pattern to today’s chart pattern occurred.
Comparison to the 2008 Price of Gold
In 2008, the price of gold dropped, then rose, then dropped again, then rose, and then dropped again. Each time, the highs reached were lower than the previous high, and the lows were lower than the previous low.
These are classical signs that the peak was reached and the future was lower. However, this pattern occurred during the great meltdown felt in every stock and every commodity in 2008 as everyone thought the economic world had come to an abrupt end. In hindsight, that expectation was somewhat exaggerated.
The Charts in 2011-2012
The comparison of the current chart of gold of 2011-2012 to the chart of 2008 is striking. Now there is a high at about $1,900 per ounce, then a fall, a rise, a fall, a rise, and now perhaps the start of another fall, as the price seems to be weakening again.
Each time, the highs reached are lower than the previous high, and the lows are lower than the previous low. Again, these are classical signs that the peak has been reached and the future is lower.
A realistic Expectation of the Future Price of Gold
Charts, although giving us valuable information, are not always correct, regardless of the strength of the indicator. We do not expect a dramatic drop in the price of gold, although we still think it a possibility.
In fact, we think it is impossible to accurately gauge the future price of gold.
Positive Factors for a fall in the price of gold
- Stability to the economic system
- Continual improvements in US economic numbers
- Increasing demand from large numbers of new middle class consumers in China, India and elsewhere
- Reduction in fear worldwide of rampant inflation and instability
Positive Factors for a rise in the price of gold
- European debt crisis continues and could explode
- Debt continues to rise worldwide
- A stall in the Chinese economic miracle
- Economic numbers worldwide are still anemic and could reverse
Wager on the Price of Gold
As we commented previously, there are substantial and logical theories for each of the views, and no-one can accurately predict what will really happen. Gambling on gold at these prices and in this environment is a fool’s game. You have similar odds in going to any casino.
We think that gold is somewhat stable at current values, and that its trading range is now between $1,200 and $2,000 per ounce. At these prices, there is a very logical way to buy gold – buy Junior gold producers.
Senior (Major) Gold Producing Companies
Examine some stocks of major gold producers. They have not risen with the price of gold, but have stayed at roughly the same value year after year. Their costs increase. Their bureaucracy increases. Their reserves dwindle and they buy more reserves by diluting their stock, and so on.
Some examples:
Barrick Gold Corp (ABX) – the stock has risen and fallen, but today it is lower than it was at the end of 2007. Over a five year term, it has gone no-where, except if you were lucky enough to buy the dips. In 1997, it was approximately at today’s price.
Newmont Mining (NMC) – in 2003 it was at the same value that it is at today. What an awkward investment that would have been, except if you had bought the dips and sold the highs.
Buying Junior Gold Producers and Near Production Junior Gold Stocks
Buy stocks in safe jurisdictions, with good management, with proven reserves, and with nearby infrastructure. Consider that the majors are continuing to boost their reserves by buying new discoveries. Examine the number of junior gold mining companies that have been taken over in the last number of years. It is a repeating pattern.
Is Producing Gold from the Ground Profitable?
It most certainly is. The average cost of production varies with the type of deposit, whether it is open pit or underground, and many other factors. The average cost today is around $700 per ounce.
Do The Math
Produce at a cost of $700. Sell at $1,900. Profit is $1,200 per ounce. Pretty good.
Produce at a cost of $700. Sell at $1,200. Profit is $500 per ounce. Pretty good.
It is hard to find another business that has profit margins this high. The only one that comes to mind, is Junior Silver producers. The same metrics apply.
We may or may not have positions in the securities we name. In making an investment decision numerous factors must be considered including portfolio balancing, timing, cash and capital reserves, asset allocation and other factors. Readers are strongly advised to do their own research. Matters discussed contain forward-looking statements that are subject to risks and uncertainties and actual results may differ materially from any future results, performance or achievements expressed or implied.
Views expressed are opinions and not investment advice. Persons investing should retain a licensed professional to guide them and not rely on the opinions expressed herein. This report is neither a solicitation nor a recommendation to buy or sell securities. We are not a registered investment advisor nor a broker-dealer. The information contained herein is based on sources which we believe reliable but is not guaranteed as being accurate or a complete statement or summary of the available data.
