Gold Price Projections – Terry Kinder
by Terry Kinder, The Daily Coin With the gold price closing last week near the $1,200.00 mark, now would be a good time to look at some gold price projections. There have been over the course of the past few years, for better or worse, some very optimistic projections of the future gold price. Ultimately, as someone who holds both physical gold and silver, I would be quite happy if projections of $2,000.00, $3,000.00, $5,000.00 or even $10,000.00 came to pass. However, as an analyst my job is to provide you, the reader, with an accurate and unbiased analysis of price, regardless of what I hope may occur in the future. Young Numismatist Before diving in to the gold price forecast, I should preface it with a history of my evolution from numismatist (coin collector) to holder of precious metals, early attempts at analysis and then my views at present. I became interested in coins and collecting back in the 1970’s when my grandparents gave me some old coins – mostly old Lincoln Wheat Back Pennies. I tend to be obsessive about my hobbies and other interests, and certainly collecting coins was no different. I became interested in many different aspects of coins – from who designed them to error varieties and more. I had the good fortune that my parents owned a small chain of retail clothing and variety stores, which gave me the opportunity to search through change to find more coins for my collection. During this time I found many coins, from Franklin Halves, 35% Silver Jefferson War Nickels and more. In fact, one time I found a whole roll of 90% silver Kennedy Halves that actress Stella Stevens, who had a home in our area, had deposited in the bank. Needless to say, I was quite excited to make that discovery. As a young coin collector I even formed an organization named Collectors for New Coins (CFNC) to lobby the U.S. Mint to change the designs of U.S. coins. My Dad, who also tended to be a little obsessive about hobbies, got pretty excited about collecting coins. One time he ran across a coin shop going out of business and purchased a treasure trove of coins – everything from a two-cent piece to Indian Head Cents. We also had a number of proof sets, including some in the original mint packaging from the 1950’s. Dad also won a few Morgan Dollars in Las Vegas one time and brought them home to add to the collection. Youthful Enthusiasm and Dad’s Sage Advice It was around this same time, between 1979-1980 that the price of silver and gold really took off. I used to buy Coins Magazine every month and update the value of our coin collection every month. I was quite excited about the prices of our coins going up every month. One time, I recall, my Dad said something I will never forget – A thing is only worth as much as someone is willing to pay for it. It was a sage piece of advice from a man who spent his entire life involved in the retail trade which was full of competition and where prices mattered. Ultimately, he turned out to be right. By January of 1980 the silver and gold prices began to run out of steam. The excitement of watching our coin collection price go higher and higher turned to despair for me as each month prices fell lower and lower. It was a good lesson. No price goes up forever. Silverbug and Early Efforts at Analysis As I got older, I held on to my coin collection, but wasn’t really an active collector. Eventually, in need of cash, I ended up selling the whole thing to a local coin dealer and didn’t really think much about coins or precious metals for a long time. Then, the Great Financial Crisis (GFC) hit. For me, the GFC changed everything – from my beliefs about politics to my beliefs about economics and more. It was during this time that I began to look more closely at precious metals as both an investment and as a way to hedge against the risks that seemed to lurk everywhere. It was another exciting time for me. I started buying silver rounds back when they were around $13.00 if memory serves. At the time I was wildly optimistic about the silver price. By early 2011 I was constantly searching for bargain priced silver rounds, and also tried my hand at some early analysis. Below is a snippet of what I sent my older brother Dennis by email on January 2, 2011.
My research leads me to believe that silver prices will continue to rise and that the U.S. Dollar will continue to fall – these are related but not always in lockstep trends. My thought is that the U.S. has a deliberate policy of dollar devaluation for some, if not all, of the following reasons:
Reduce Current Account Deficit (CAD) with foreign nations Reduce burden of U.S. deficit through inflating the currency Force China to end peg to U.S. Dollar (related to first point of reducing CAD)
There are probably other reasons the government might wish to devalue the currency, but those are three of the important ones. U.S. Dollar has been falling in value since around FEB 2002, although it did increase after financial crisis with the “flight to safety” to the dollar from other countries. I think the long-term trend is that the U.S. Dollar will continue to fall. Have read articles indicating anywhere from 20-40% devaluation from dollar index high of around 120 is believed necessary by economists to re-balance trade with other countries. There is also a currency of thought that believes that there is the possibility of overshooting any given devaluation target. My thought is that dollar index (DXY) continues to decline medium-term or longer to somewhere below 60 before recovering. DXY currently at a little over 79. That would be about a 25% decline. Of course, the opposing viewpoint is that the dollar could move higher: http://www.cnbc.com/id/40864722
A couple of noteworthy things about my early attempts at analysis: 1) It was based on fundamental analysis, analyzing such things as Current Account Deficits (CAD); 2) The analysis considered the opposing point or points of view. On April 17, 2011 my early analysis of the silver price appeared in the now defunct Daily Libertarian. Here’s an example of my then too optimistic view of the silver price:
The decline of the dollar is an ongoing trend. Devaluation is a deliberate, coordinated government policy. In January 2002 the U.S. Dollar Index (DXY) was roughly 120. By December 2004 it had declined to 81. By June of 2010 the DXY had made a pretty stunning recovery to around 88. Using the January 2002 to December 2004 decline as a guide, I am predicting the DXY to decline to about 60 by May 2012. That also lines up pretty nicely with an overshot – 50 percent instead of the 40 percent decline – thought necessary to bring the current account deficit (CAD) back into balance. So, what does that mean for the price of silver? I believe silver will go to $200 per ounce, perhaps more.
By April 25, 2011 silver peaked at nearly $50.00 per ounce. Between the time my article appeared in the Daily Libertarian, and the peak I made the decision to sell all of my silver – almost exactly at the top of the market. Despite my optimism about the silver price based on fundamentals, something just didn’t add up. Silverbug Part 2 and the Abandonment of Fundamental Analysis I didn’t stay out of the silver market for long after selling my stack in April of 2011. In fact, my misplaced optimism has resulted in a good portion of my position being underwater to this day. It was a hard, but good lesson to learn. Dad was still right, a thing is worth what someone is willing to pay for it. As the silver and gold prices continued to fall, I began to wonder why fundamental analysis of gold and silver – my own included – had such poor results. It was during this period that I turned to technical analysis. There is rightly a good deal of skepticism when it comes to technical analysis. Some of that owes to the fact that some analysts have allowed their own biases to cloud their analysis. In fact, technical analysis is simply using price information to forecast the future direction (and momentum) of price. Analysis of price is superior to fundamental analysis. The problem with fundamental analysis is as follows: 1) Lack of agreement over what are the fundamental factors affecting the prices of gold and silver; 2) Fundamental analysis cannot be applied consistently to predict the future price direction (or momentum); 3) Fundamental factors constantly shift and have to be revised. If the factors are truly fundamental this should rarely, if ever, need to occur. In contrast, price analysis works with the only relevant determinant of price which is price itself. While on its face the reasoning is circular, let me explain. Price encapsulates all of the information known (perhaps unknown consciously as well) about any given good. In essence, all of those things called fundamentals are already contained within the price. Whereas fundamental analysis represents an attempt to pick and choose amongst the factors that “should” determine price, technical analysis accepts that the price is the price and that no one individual has more knowledge about what the price ought to be than the thousands, millions or more people whose input determined the current price in the first place. From F A Hayek to Price Analysis Recently, in Examining the ECB QE Narrative, I highlighted the following video interview of F A Hayek on the power of pricing: I made the following relevant comments on the Hayek video: Just to emphasize Hayek’s brilliance, the bullet points that will follow are based on what he said in only the first minute and thirty seconds of the video. First we’ll look at what Hayek said. Then we’ll examine why using pricing information and technical analysis if preferable to relying on narrative and limited personal knowledge. Hayek on pricing: We are not willing to accept the guidance of the price mechanism; We learn by abstract signals – the prices; We don’t possess the knowledge. The knowledge of facts is widely dispersed; We want to make use of knowledge possessed by millions of individual people; You can’t concentrate knowledge; Signals tell you about facts which nobody knows concretely in their totality; You can’t correct signals which inform you about circumstances you don’t know Essentially Hayek begins by stating something fairly obvious, a good many people won’t accept the guidance of the price mechanism. We see it all the time with government meddling with issues such as health care. Few remember that much of today’s health care debacle arose out of government wage and price controls under President Franklin D. Roosevelt. In order to alleviate the ills caused by those controls, insurance was excluded in order to give businesses a way to give employees something of economic value and get around wage limits. This was a “fix” for something government broke in the first place. Over the years, government kept applying these “fixes”, breaking more things as time passed, until the latest “fix”, Obamacare, broke even more stuff. Don’t worry, some future president will come up with a “fix” for that too. So, a good portion of society wants to get around the pricing mechanism. However, the pricing mechanism is the only thing that allows us to tap the knowledge of millions of people. As an individual, I can’t possibly know what millions of other individuals know. Sure, I can assume I’m smarter than several million people, but it’s probably a good bet that a collection of millions of individuals knows more about oil, diamonds, coal, corn, or microchips than I do. The pricing mechanism takes this disperse knowledge and boils it down to one thing – price – which creates a signal everyone can act off of. If the price of oil drops to a low enough level, drilling will be reduced. If the oil price goes high enough, people will reduce their use of oil, gas and other products. Furthermore, Hayek says you can’t concentrate the knowledge (captured by prices). That’s why socialism / communism ultimately fail. A central committee of a few individuals is not able to know more than millions of people. It’s simply impossible. Price signals tell you about facts that nobody can know in their totality. Central planners think they can somehow “correct” those signals as if they know more than everybody else put together. But central planners, whether communist central committees, or central bankers, can’t know more than anyone else put together. It’s just not possible. In sum, it is the following that make price far superior in terms of analysis versus fundamentals: 1) Price concentrates the knowledge possessed by millions of people into one abstract signal, price, which allows people to make decisions; 2) We learn from those abstract signals, or prices, over time; 3) Knowledge can’t be concentrated as socialistic and communistic systems have attempted to do in the past. A single individual, or a committee, cannot know more about the market than the market taken as a whole, which is represented abstractly by price signals; 4) You can’t correct price signals which is why wage and price controls have failed in the past. By the same token, it does no good to say a price is incorrect because your individual view of fundamental factors says it should be different from what it actually is. You Can’t Fight the Price as an Analyst In the past I have been critical of several analysts who have made price forecasts that seemed out of sync with what a careful review and analysis of price would seem to warrant. Two recent calls, without naming the specific analysts, called for $2,000.00 and $10,000.00 per ounce gold by the end of last year. These forecasts, if we choose to call them such, were wildly wrong. I’m not certain whether some biases have entered into their analysis or if, perhaps, their analysis relies too heavily on fundamental considerations. Regardless, the analysis which follows does not rely in the slightest on fundamentals. Instead, my analysis relies on Point and Figure Analysis. Point and Figure Charting is decidedly “old school“. The technique is well over 100 years old. One of the best treatments of the subject is Jeremy du Plessis’ The Definitive Guide to Point and Figure. I am not going to go into great detail here exactly how to analyze price using Point and Figure except insofar as necessary to explain how each price target was arrived at. If you’re interested, the first link in this paragraph above provides lots of good information about Point and Figure. For all of the information you could ever want about the technique du Plessis’ book is probably one of the best books available. A Few Notes Before Looking at the Gold Chart A few brief notes on the Point and Figure chart of gold are required. First, the prices are based on information from the Bundesbank. I used prices from the Bundesbank rather than the London Fix because I couldn’t find a database that contained enough years of price information in a usable form for the London prices. Second, you will likely notice that the maximum price on this chart is $1,878.00 instead of above $1,900.00. This owes to the 3 box reversal technique required to put either an X (higher price) or an O (lower price) on the chart. The closing price of gold would have had to have been $1,918.00 to place a higher X on the chart. Each box on the chart represents a $20.00 move up or down. Since the highest O on the chart was $1,858.00, a 3 box reversal would have been a $60.00 move higher resulting in a box being placed at $1,918.00 ($1,858.00 + $60.00 [3 boxes x 20 = $60.00] = $1,918.00). Additionally, Point and Figure does not forecast when price targets will be reached. Timing is essentially irrelevant to Point and Figure Analysis. Finally, the Gold Chart (click to enlarge) The chart above has the following price targets for gold: A) $1,098.00; B) $1,038.00; C) $438.00; D) $578.00; E) $738.00; F) $938.00; G) $1,058.00; H) $1,138.00; I) $798.00; J) $1,578.00 Calculating Each Price Target A) $1,098.00 – High X price of $1,878.00 – $780.00 (13 O’s lower in column following high X multiplied by box value of $20.00 = $260.00. $260.00 x 3 [box reversal size] = $780.00) = $1,098.00; B) $1,038.00 – High X price of $1,878.00 – $840.00 (14 horizontal boxes from X to O multiplied by box value of $20.00 = $280.00 x 3 [box reversal size] = $840.00) = $1,038.00; C) $438.00 – High X price of $1,878.00 – $1,440.00 (24 horizontal boxes from X to O multiplied by box value of $20.00 = $480.00 x 3 [box reversal size] = $1,440.00) = $438.00; D) $578.00 – High X price of $1,778.00 – $1,200.00 (20 O’s lower in column following high X multiplied by box value of $20.00 = $400.00. $400.00 x 3 [box reversal size] = $1,200) = $578.00; E) $738.00 – High X price of $1,458.00 – $720.00 (12 O’s lower in column following high X multiplied by box value of $20.00 = $240.00. $240.00 x 3 [box reversal size] = $720.00) = $738.00; F) $938.00 – High X price of $1,418.00 – $480.00 (8 O’s lower in column following high X multiplied by box value of $20.00 = $160.00. $160.00 x 3 [box reversal size] = $480.00) = $938.00; G) $1,058.00 – High X price of $1,418.00 (note this is same level as high X of F, but I forgot to place G label where I should have) – $360.00 (6 horizontal boxes from X to O multiplied by box value of $20.00 = $120.00 x 3 [box reversal size] = $360.00) = $1,058.00; H) $1,138.00 – High X price of $1,378.00 (note I forgot to label the X at $1,378.00 with label H) – $240.00 (4 horizontal boxes from X to O multiplied by box value of $20.00 = $80.00 x 3 [box reversal size] = $240.00) = $1,138.00; I) $798.00 – High X price of $1,138.00 – $540.00 (9 O’s lower in column following high X multiplied by box value of $20.00 = $180.00. $180.00 x 3 [box reversal size] = $540.00) = $798.00; J) $1,578.00 – Low O price of $1,158.00 + $420.00 (7 X’s higher in column following low O multiplied by box value of $20.00 = $140.00. $140.00 x 3 [box reversal size] = $420.00) = $1,578.00. A Few More Notes on the Chart All of the current prices above are valid targets. However, they can be invalidated. For example, should the price move low enough that an O can be placed below $1,158.00, then the upside target for J of $1,578.00 would no longer be valid. Likewise, if price rises to the point where an X can be placed above $1,338.00, then the downside target for I of $798.00 would be invalidated. It should also be noted that, generally, the very lowest or highest (if there are multiple targets) target prices won’t be reached. So, unless something changes the chart where an even lower target than $438.00 becomes possible, it would be fairly safe to say that it is not likely that the $438.00 target will be reached, although we should never say never either. Conclusion Well it has been a long, wild ride, both personally, and in terms of the gold chart to arrive here. I began my journey as a young coin collector and evolved through stages of wild optimism based on debatable and ever-changing fundamental analysis. Finally, I arrived at the conclusion that analysis based on price was the best form of price analysis. As an analyst, it is my job to set aside my personal desire for the gold price to move higher and present you with an unbiased analysis of the price. F A Hayek pointed out that knowledge is widely dispersed. This makes it highly improbable for any individual to possess more knowledge than that encapsulated by the price. It is only through analysis of the price, and price alone, that we can grasp where price will move in the future. Relying on fundamentals, as some analysis does, makes the mistake of assuming that the analyst somehow possesses more knowledge than the market as a whole, something which is next to impossible. Terry Kinder: Editor, Senior Analyst, Terry Kinder’s Gold and Silver Prices You can find Mr. Kinder’s work at Gold Investing and at Bullion Directory. Terry’s Full Bio