Interesting comment along the same lines from Ray Dalio today:
"...Dalio also cited the importance of inflation as a guidepost for monetary policy. A number of top Fed officials are watching inflation before embarking on a gradual course of rate increases.
'If I was running monetary policy, I would wait to see for the whites of the eyes of inflation,' he said."
That's been my contention for some time now. If rates rise only with inflation then real rates will not go up. Higher real rates is the main premise behind GS Jeffrey Currie's call for lower gold.
The drop in oil prices as well as lower operating costs at non-US mines (in terms of US$$) should partially mitigate lower gold price effect on miners' earnings.
Mines outside the US should hold up better than US mines, all else being equal.
It is truly bizarre. In the greatest bastion of capitalism in the world, markets dissect in great detail every word from the central planner FED.
The gold price's relationship to inflation is all over the map on any period less than 20 years. Dalio's premise is that gold is a currency and currencies go down vs other currencies when you print more of them. In a deleveraging governments create more currency in order to ease the debt reduction process. This causes their currency to go down against gold. Of course as we've seen these things changes do not happen in a smooth, straight line (trying to keep a straight face).
According to Ray Dalio's In-Depth Look at Deleveragings, the price of gold has on average risen 10%/year against the currency of the country undergoing deleveraging. I think it's pretty plain that the US is in the process of deleveraging, although the FED is effectively trying to both make this process easier and postpone it by repressing interest rates.
I decided to see where we stand in terms of Mr. Dalio's numbers. I took $800 as a conservative starting point for gold price when US deleveraging began in 2008 (in reality the average price was higher than that but it was a volatile year). Here are the prices assuming a smooth 10% annualized gain (ha ha!):
2009 - 880
2010 - 968
2011 - 1,065
2012 - 1,171
2013 - 1,288
2014 - 1,417
Based on this admittedly simple analysis, the price reached in 2011 had clearly gotten ahead of the average, while the current price is now somewhat below average. Just one more way of looking at things. Maybe the goldbugs, calling for $5,000 gold, and the "barbarous relic" bears calling for $1,000 are both wrong. Maybe the truth lies where it usually does in my experience, somewhere in between.
The interest rate increase everyone is obsessing about is a red herring. The key for gold is interest rates relative to inflation (even Jeffrey Currie, of Goldman Sachs and current gold bear, says so). The Fed has indicated that it is prepared to have any tightening lag inflation pressures. They will see lack of inflation as indication of slack in economy and that will postpone any increases. This pretty much guarantees negative real interest rates for the foreseeable future.
A company like Polyus might buy Russian operations. They are a large Russian miner that wouldn't face the same risk of being caught up in trade disputes or worse if Ukraine deteriorates
The same can be said of any representation of money. The US dollars or Euros in your pocket are just as useless except to the extent that they are accepted as a medium of exchange. Gold has been accepted for thousands of years. To be clear, I am not a gold bug but it seems to me the faith in one currency over another has gone up and down over time and at this time there are a lot of reasons to have less faith in most fiat currencies. We are seeing that loss of faith in a general rise in all assets - equities, bonds, real estate, and until a few years ago gold. Nobody wants to hold cash which is being created at a dramatic pace. For the time being gold is out of favor while equities and bonds rise. That will change.
Take a look at the Indian SENSEX, up a whopping 45% in the past year. Gold demand is suffering there for the same reason as here, stocks have been going gangbusters and taking investment demand from other asset classes such as gold. I think once equity rally comes to an end, demand for gold will return.
I'll take a shot at answer. The single biggest change since 2000 is real interest rates, which are much lower now than in 2000. For inflation followers, don't forget we had 20 years of relatively high (though declining) inflation from 1980 - 2000. During that time gold went from $800 to $200. So I think its safe to say in hindsight that gold overshot inflation worries in 1980 and undershot by 2000. Much of the climb from $200 since 2000 was adjustment from central bank selling induced bottom.
I think a takeover of Kinross in its current form is unlikely. They are in too many corners of the world to be of interest to any one acquisitor . More likely would be a breakup and sale of pieces, with possibly one or more mines remaining in Kinross.
There has been much talk of absent physical demand from Asia as though it was an additional factor in gold's downward price pressures, additional to the competing appeal of rising stock markets. I would argue it is one and the same factor. The Sensex in India and both Hong Kong and Shanghai stock markets are all hitting 52-week highs along with S&P. This has to be having the same effect on Asian investors as it is here.
Once stock markets relentless climb comes to an end gold will rally.
I agree 100% and would just add that weaker Euro and generally weaker economies in Europe, Japan, China, etc. will take pressure off Fed to raise rates. I would think they are already uncomfortable with the spread between US treasury rates and German bonds. Btw am also fighting urge to throw in towel.
One thought I had is to pick some shares of Dundee Precious Metals - with mines in Eastern Europe. Much of their local costs are in Euros and margins should benefit from lower currency.
There has been a noticeable dearth of serious discussions/comments/opinions about gold miners lately. Yahoo has mostly plugs for other sites plus a few serial posters who offer the same useless comments repeatedly.
Admittedly this is not much help as a timing tool, but it does suggest a low in interest in the miners which may be indication of a turning point on the horizon. I remember the plentiful comments here as gold climbed toward $1,900. They continued, more heated, as gold tumbled last year. Now... crickets.
Good time to invest?
Why not ask why gold went from $800 in 1980 to $277 in 2000, 20 years during which there was plenty of inflation? The price of gold clearly doesn't follow inflation over short or even medium term. It does seem to inversely parallel real interest rates however, which are negative at the moment as they were in the 1970s during the last bull market. Inflation may move higher soon, interest rates may move higher soon but I'm willing to bet the difference remains negative for quite some time.
2) YOY is down because 2013 was so strong as Asian countries bought at record pace. The flip side of that is the selling wave from ETFs in the west has subsided. I don't think we'll see the same sell off in gold with a real estate crash in China. As American and European real estate cratered, gold had been one of the best performing assets recently, so was a natural place to raise cash. That's not true at this moment.
3) True but a lot depends on what ECB does to fight deflation. Printing more Euros will ultimately be good for gold.
4) inflation certainly is a wild card. I have no idea what the future holds in that regard but I'm pretty sure the fed will raise rates only when we start to see some inflation and they will likely be forced to keep rates low relative to inflation for many years. It's this low or negative real interest rate that I think will keep gold well bid and going higher.