There's Just Not Enough Gold; Modeling A Dollar Flight To Gold -
By Doug Dillon Jan 17 2008 2:47PM
A significant rise in inflation has been seen (and can be expected to continue) given the double-digit growth of the money supply now occurring in the US, the EU and other G-20 economies
This article models, in a simple fashion, a dollar flight to gold’s impact on the price of gold.
This growth in the money supply has actually been taking place since the mid-1990s. The excess money has to go somewhere and since the mid-1990s it has found its way into the Internet stocks producing a bubble and, following that, into the recent housing market causing the housing / subprime-mortgage bubble. This article concludes with some thoughts about how gold differs from the Internet stock and Housing bubbles.
Table A provides a basic perspective on how the gold mining industry compares to the global economy. As you can see, even at recent elevated gold prices, the value of gold being mined is only .2% of the world GDP. Gold mining is thus an extremely small component of the world-economy. Total existing gold demand is balanced with supply at current prices and is roughly 98 billion dollars annually. Most of gold mine production (74%) is used for fabrication (primarily jewelry). The remaining demand is classified as investing demand. Importantly, gold investment demand constitutes just 0.05% of global GDP. All of this points to the fact that even a very minor shift of the world’s investment into gold will have a huge impact on gold demand.
This article explores this impact by means of a model. The basic outline of the model is as follows:
* In a flight to gold scenario, supply is assumed to be inelastic. That is, existing holders of gold will not want to part with their gold (because its price is rising and the dollar is unattractive). The other supply of gold is what comes from gold mines. The lack of production increases in the face of the rapidly rising price of gold over the last few years demonstrates that supply of gold is also inelastic. So, the model has the supply of gold being perfectly inelastic at the current rate of mine production. This is a bit of a simplification, but it still allows real insight into the effect of a flight from the dollar to gold.
* Existing demand is considered separate from any dollar-flight demand and is assumed to remain constant in dollars. Thus the amount of oz of gold going to this existing fabrication and investment demand scales inversely with the price of gold.
* Additional annualized dollar-flight demand is assumed (based on illustrative guesses by the author of what seems reasonably likely).
* The modeled price of gold is then the total annual demand divided by the annual mine production.
Table B models the effect of a flight of petrodollars to gold. The oil producing countries listed in the table have already expressed, to a great or lesser degree, dissatisfaction with the use of the dollar as the reserve currency, either for political reasons or because of inflation resulting from the dollar’s recent devaluation. Table B models the effect of those countries investing a small fraction, 5%, of their oil revenue in gold rather than dollar denominated financial instruments. This results in an additional $54 billion of gold demand which pushes the modeled price of gold to $1401 / oz. This change of investment policy could continue for a number of years pushing the price of gold up indefinitely.
China has a huge trade surplus to the United States and is holding 1.2 trillion dollars of reserves. Table C models the effect of China, over the course of a year, shifting 5% of those reserves into gold. This increases gold demand by $60 billion pushing the modeled price of gold up to $1454 / oz. This change in investment policy might continue beyond a single year as the trade imbalance persists and as China continues to move additional fractions of its reserve from the dollar into gold.
Table D models the effect of a very small fraction (1%) of US household financial assets being moved from where they currently reside (equities, mutual funds, bonds, pension funds holding the same) into gold. US household financial assets are so large that even a 1% shift increases gold investment by $422 billion pushing our modeled price of gold up to $4769 / oz! This illustrates how sensitive the price of gold is to a change of investor sentiment.
Table E models the effect of a minor panic flight from the dollar. In this scenario all of the previous shifts take place at once and the amount shifted is doubled. Having multiple different simultaneous dollar flights to gold is not unreasonable. If the dollar becomes severely unattractive you would expect many holders to head for the exit door at the same time. The doubling of the previous four modeled flights seems to the author to underestimate the effect of even a minor panic. This scenario, as modeled, yields a modeled price of gold is then $10,771.
The graph below summarizes the modeled results.
The author does not consider any of the above modeled-gold prices to be forecasts. He does consider them to be very illustrative of how sensitive the price of gold is to even minor shifts of investment from the dollar into the gold.
There have recently been a spate of forecasts of upcoming gold price rises based on adjusting for inflation the 1980 peak price of gold. The author submits that these forecasts could be way too low if a serious flight from the dollar to gold takes place.
As a postscript, there remains one important thing to say about how a dollar flight to gold differs from the Internet stock bubble and the Housing bubble. The supply of gold is inelastic. Even though the price of gold has more than tripled in the last few years (from $250 / oz to around $900 / oz), gold mine output has stagnated.
The supply of worthless Internet startups was, as we found out, anything but inelastic. After the mania got going, Wall Street produced out of thing air a limitless supply of worthless Internet startups. Soon the bubble popped and the price of those worthless startups price reverted to their actual value, zero.
Similarly, homebuilders have found that the supply of new houses, while initially inelastic, was quickly made elastic by the flood of houses brought to market. Home prices are now returning to their actual value.
In the first really classic bubble, the Dutch discovered that the supply of tulip bulbs, while initially inelastic, after a couple of growing seasons was completely elastic. The bubble burst and the rest is history.
Because the supply of gold is inelastic, the rise of the price of gold does not constitute a bubble, at least not the same as the Tech bubble, Housing bubble and Tulip Mania. It is not susceptible to the same kind of wall of supply induced collapse.
The dollar is completely different from gold. Its supply, like the other fiat-currencies, is like worthless Internet startups: perfectly elastic. Just as venture capitalists could produce a limitless supply of Internet startups, central banks can produce a limitless supply of fiat currency. It is this very difference in elasticity between the dollar and gold that could trigger a flight (or panic) from the dollar to gold.
Repairs will involve a team of about 50 people, including navigation experts and cable engineers, said Flag Telecom.
The ship that will repair the first severed cable is already in place, with repairs underway, while the second vessel is expected to begin work on Tuesday.
Bespoke ships
"It will be a highly technical job and should take a week to complete," a spokesperson for Flag Telecom told the BBC News website.
The cause of the damage has not been officially confirmed but there have been reports that the breaks were related to a tanker dragging its anchor along the sea bed.
Disruption after web cables cut - to biggest Gold buyers in the world -
Indian call centre workers - The outsourcing industry has so far seen few problems Firms across the Middle East, India and Bangladesh are experiencing disruption after undersea broadband cables were damaged between Egypt and Italy.
I have no concern whatsoever with regards to the gold market. I see this all as noise as gold heads to $1650.
Isn't $1065 quite close to $1050?
I imagine Mr. Hulbert's price objective is a compliment.
The coming gold surge Commentary: There are plenty of factors aligned to drive prices up By Sean Brodrick, Money and Markets Last update: 12:01 a.m. EST Feb. 4, 2008
JUPITER, Fla. (MarketWatch) -- Gold has enjoyed a great run over the past few years, but it hasn't been a straight path.
There have been enough dips and outright plunges to make gold traders feel like they're riding the devil's own roller coaster. But one strategy has worked time and time again: Buy the dips.
It takes courage to buy when everyone else is selling. But if you do your research, you can act with confidence that even if gold dips lower than you're buying it, the upside potential is huge.
My preliminary price objective for gold is $1,065 per ounce, and it could go a lot higher than that. Let's look at some forces driving precious metals higher.
gold production fell to a 10-year low of 2,444 metric tonnes in 2007, according to Gold Fields Mineral Service. This year, production will likely drop again. While China is producing more gold -- up 12% -- South Africa's output is falling off a cliff, down 8.1%.
Gold miners are exploring frantically, but the mother lodes are getting harder to find. This should drive consolidation in the industry going forward as the big companies gobble up the smaller fish to replace their reserves. Imo. Tia.
Most hardcore gold bugs will tell you the gold price is manipulated -- or that the authorities at least attempt to manipulate it.
Our Glorious Leader, Gordon Brown's gold sale was, apparently, all part of a scheme to suppress the price -- otherwise he would not have sold it when he did and in the way he did, would he?
Of course, it doesn’t occur to them that this might just have been down to plain old incompetence. Judging by other government fiascos like the tax credits system and the Northern Rock debacle, the incompetence argument certainly carries a lot of weight.
But let's not dismiss the conspiracy theories too hastily. ...
Is the gold price being manipulated?
I can categorically state, with 100% confidence, I don't know. But far greater minds that mine have studied the matter for many years and in great detail. People like GoldMoney founder James Turk, Gold Anti-Trust Action Committee (GATA) chairman Bill Murphy, and fellow GATA member Chris Powell.
They are convinced it is at least "managed." And to be honest, when you follow their research and reasoning, the case is extremely compelling. (There's far too much to go into detail here, but it's well worth visiting www.GATA.org to learn more).
On the other hand, the strongest case I have been able to find against the existence of gold-price fixing isn't exactly watertight. It boils down to dismissing the whole thing as "just a conspiracy theory" and arguing that the perpetrators of the conspiracy are cranks, crackpots, and Cassandras. (Cassandra, in case you're not up-to-the-minute on your Greek mythology, was a princess who was given the ability to see the future, but was also cursed so that no one would believe her predictions. So deriding someone as a Cassandra is actually admitting that he's right).
Even so, I have some sympathy with this view. I belong to the school of thought which says, "Never ascribe to malice that which can be explained as incompetence," as my comments on Gordon Brown might suggest.
However, I do not believe that men as intelligent as James Turk, who I have interviewed many times on my radio show, would devote a lifetime's research, study, and endeavour, let alone face so much criticism, to prove something, if there wasn't more than a grain of truth to it.
So, to conclude, I think there's something to it.
...The gold conspiracy hits the mainstream
And here's an interesting thing. Last Thursday GATA spent a quarter of a million dollars buying a full-page ad in the Wall Street Journal, which you can read here --
In the ad, they declare that US gold reserves have not been audited for over 50 years and they call for the US government, via the Freedom Of Information Act, to come clean about how much gold it really has.
The first thing to note about this is how expensive advertising space is in The Wall Street Journal. The second is that it put gold in the mainstream news, if only for a day. The third is that the following day, after rallying to an all-time high during London trading, the gold price was absolutely hammered down in a big way.
A coincidence? Maybe.
A rising gold price says to the world that "something is rotten in the state of Denmark." People buy gold when they’re scared that the financial system isn't working correctly, and there’s plenty of evidence of that. We know the banking world is trying to conceal the rot. They surely wouldn't have wanted the gold price rising to record highs just as the mainstream press was talking about that frighteningly expensive ad in The Wall Street Journal.
Where next for gold, though?
Short-term traders, a re-test of $850 an ounce is more than possible -- as is a breakout to new highs. Without wishing to state the obvious, it's a gamble. A friend of mine made a small fortune shorting this market on Friday. Me? I thought he was barmy. Short this market? You're better off picking a fight with David Haye.
GATA Goes to Washington -- Anybody Seen Our Gold? Thursday-Saturday, April 17-19, 2008 Hyatt Regency Crystal City, Arlington, Virginia http://www.gata.org/washington
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Goldcorp compared to Barrick and Newmont - were do you want to be -
VANCOUVER, BRITISH COLUMBIA--(Marketwire - Feb. 21, 2008) -
All Amounts in $US unless stated otherwise.
GOLDCORP INC. (TSX:G)(NYSE:GG) today reported record net earnings of $256.5 million, or $0.36 per share, for the quarter ended December 31, 2007 and $460.1 million or $0.65 per share, for the year. Production in 2007 increased 35% to 2,292,600 gold ounces at a total cash cost of $163 per ounce.
Fourth Quarter 2007 Highlights:
- Revenues increased 42% to $679.8 million.
- Gold production increased 9% to 638,900 ounces(2).
- Total cash costs of $195 per gold ounce(2),(3), net of by-product copper and silver credits.
- Operating cash flow of $327.1 million, before changes in working capital(4).
- Reaffirms 2008 guidance of approximately 2.6 million gold ounces at a total cash cost of $250 per ounce.
2007 Full-Year Highlights
- Enhanced position as top gold producer in Canada by acquiring 100% ownership of Musselwhite and Porcupine mines in Ontario.
- Approved Penasquito expansion to 130,000 tonnes per day.
- Increased gold reserves 9% and silver reserves 37%.
- Completed portfolio simplification initiative by disposing of non-core assets: Peak, Amapari and 50% stake in La Coipa.
- Sold entire investment in Silver Wheaton to syndicate of underwriters for cash proceeds of approximately $1.6 billion, received February 14, 2008.
- Paid $126.9 million in dividends.
God Bless America
Ps. Judge for yourself and then decide whether you wish to join the strike. WE ARE CHANGE!!!
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