Tag: price of gold

Rabobank: “Gold is a bubble which will burst”

Gold is a bubble which will burst, according to Rabobank chief investment officer Han Dieperink. In his latest update on financial markets, he expects gold to drop below $500 per troy ounce, much lower than the current price of about $1.315 per troy ounce. He sees a pattern in the price of gold which resembles a bubble that is about to burst, presented in the graph below. Apparently, he doesn’t take into consideration the lowest interest rates ever recorded in human history and the fact that central banks are adding gold to their reserves.

According to Dieperink, the inflation-adjusted price of gold has been around $400 per troy ounce for the last hundred years. From his perspective, the rise of gold to $1.900 per troy ounce back in 2011 was clearly a bubble. Based on his bubble theory, he expects the gold price to fall by as much as 70% to a level below $500 per troy ounce. The Rabobank analyst made a similar forecast in late 2015. Since then, the price of gold rose from a multi-year bottom of $1.060 all the way to $1.370 per troy ounce.

Rabobank still negative on gold

While analysts from ABN Amro, JP Morgan and Credit Suisse revised their gold forecast to a new reality of lower rates and more quantitative easing, the Rabobank sticks to the $500 scenario. Dieperink points to the negative interest rates, the Brexit referendum and fear in the financial markets to explain the rising price of gold since the beginning of this year. But apparently, he doesn’t expect those fundamentals to have a long-lasting impact on the price of the precious metal.

Rabobank expects gold to drop to less than $500 per troy ounce

Gold is not a commodity

According to Dieperink, there is no reason why the price of gold can’t drop below the cost of production (about $850 per troy ounce), because there is a huge above ground supply of gold in the market. This is a weakness in his reasoning, because the value of gold is not determined only by it’s use as a commodity. If that would be the case, the metal would have been worthless already, since there has been a substantial supply of above ground gold for centuries. The stock to flow ratio of gold will gradually increase over time, due to large scale gold mining.

For central banks and a large part of the world population, gold is more a wealth reserve than a commodity. The use of gold in industry is limited, because there are often cheaper alternatives around. Instead, most of the gold is held by individuals and centrale banks in the form of jewelry, coins and bars. In other words, as an alternative store of value and as a wealth reserve. The price of gold doesn’t go to zero, because the metal is being hoarded by savers and investors around the world.

In an environment of negative rates and with growing distrust towards central banks and governments, more people favor physical gold over paper financial assets. Russia, China and other central banks are not buying gold to make a buck from a new bull market in gold. No, they buy it as a tangible wealth reserve besides foreign exchange reserves.

Flight to safety

The wealthy are looking for a safe haven and the number of options is shrinking rapidly. When you think gold is a bubble, you might want to call government bonds a bubble as well. What is the purpose of buying a government bond, if the expected cashflow is zero or even negative.

20 juli 2016
Goldprice in six different currencies

Reuters published an article lately about oil prices in six different emerging market currencies. The graph embedded in this article shows how oil prices are setting new all-time highs in Brazilian reals, Russian rubles, South-African rands and India rupees. Because of the decline of emerging market currencies, people in those countries pay record high prices for a barrel of oil. But what about the goldprice?

Goldprice in foreign currencies
The graphs by Reuters inspired us to do the same with gold, which set a new all-time high in dollars in 2011. The goldprice peaked at about $1.920 per troy ounce and has declined ever since. Right now, the price of gold in dollars is about 34% below the all-time high. But what about the price of gold in beaten down emerging market currencies? Marketupdate collected some data and made the following graphs. Most of the data is from the weekly updated spreadsheet published by the World Gold Council, while some data is based on historic exchange rates on the forex market. The graphs start at the 9th of September 2011 and ends with the gold price at the end of January 2014.

Goldprice in six emerging market currencies since Sept 2011
As you can see the price of gold in some emerging market currencies didn't drop nearly as much as the goldprice in dollars or euros. In South-African rand, the goldprice was actually higher last week than it was in September 2011 (when the goldprice in dollars peaked at $1920 per troy ounce). When measured in Brazilian real, the gold price at the end of January 2014 was only 4,15% below the level of September 2011. For the Turkish lira and the Indian rupee, the gold price went down only 10,3 and 15,5% respectively, much less than the 34% price decline in US dollars over the same period.
Gold as a hedge
Gold is above all a hedge against a decline in the local currency. No matter how much governments and the central banks abuse their fiat currencies, they can not influence gold. That's why they don't like you to buy gold. The precious metal is a hedge against their fiat currency system, which is only good as medium of exchange and unit of account. The store of value lies in physical things, gold being the most liquid and uniform one of them.

6 februari 2014
Goldprice in Argentina: +28% in January

In Argentina, the price of gold rose about 28% in the first month of this year. In the meantime, the price of gold in euro’s and dollars rose about 5%. The big difference is the result of a devaluation of the Argentine currency, the peso. The devaluation is unfortunate for savers, because they saw the real value of their savings decline. The gains are for the debtors, whose debts in real terms went down by the same amount.

Argentinians who converted their savings into gold were barely harmed by the devaluation of the currency. While the money in their pocket lost some value, their gold didn’t. The price of gold in Argentina rose to such an extent that the holders of physical gold kept the value of their savings. On the first of January, the price of gold was 7.860 Argentine pesos. On the 30th of January, the price was 10.104 pesos. One day before, on the 29th, the goldprice was just 8.981 peso. So in just one day, the goldprice rose by more than 10%!

The graph below shows the goldprice in six different currencies: the Russian ruble, the Argentine peso, the Turkish lira, the eur, the Indian rupee and the Sout-African rand. As you can see most of the emerging market currencies lost value compared to both the euro and gold.

Goldprice in five emerging market currencies (Source: Goudstandaard.com)

Gold as a hedge against devaluation
Gold is often cited as a good hedge against inflation, but it would be more accurate to state that gold is a hedge against a devaluation. Sudden drops in the value of a currency are a nightmare for savers, but not for those owning physical gold. Gold stores value in an environment with currency devaluation, while the relationship between gold prices and inflation is not so clear. Last year, Venezuela devalued their bolivar by 44% against the dollar. Those holding the currency lost purchasing power in dollars, but the gold would still buy them the same amount of dollars as the day before the devaluation. Up until now, currency crises are related to banana republics and third world countries. That's why people living in those countries value gold differently than in Western economies, where the precious metal is just an investment opportunity. Gold as a speculative hedge when the stock market goes down, which has to be sold as soon as the stock market picks up again. We beg to differ...

3 februari 2014