GOLD OUTLOOK 2012
23 December 2011 by Cullen Roche
27 Comments
It’s been a wild ride for gold this year with the price surge through the first three quarters of the year and then the collapse in Q4. The sell-off has confounded many analysts and investors who thought gold would serve as the ultimate safehaven in times of uncertainty. In fact, the opposite has turned out to be the case with the US Dollar becoming the go-to asset in times of safety.
Where are prices headed in 2012? Soozhana Choi, Director, Asia Commodities Research at Deutsche Bank was on CNBC to discuss her outlook. She says gold prices will ultimately hit $2,000 in 2012 because the uncertainty of 2011 will persist and the primary drivers of the gold bull market remain intact:
Source: CNBC
Ahh yes – gold – the ultimate “safe haven”. This is really a silly concept when you think about it. If an investor is risk averse and truly looking for a safe haven to invest, why would they buy an asset which has zero yield and high volatility.
Gold is for risk-taking traders punting on capital growth – its not a “safe haven”.
For the same reason you would buy a stock that doesn’t pay dividends, either you expect capital gains or you like how it’s correlation value effects your portfolio as a whole.
If you’re a trader then you’re making predictions and betting on them, the items to be bet on don’t really matter so if you’re good at predicting gold prices then by all means bet on it. Hint: Gold has a negative correlation with real interest rates.
If you’re a passive investor then you’d have done some studies on the effects of gold ownership on your portfolio over the last 40 years and determined that for nearly any portfolio a position of between 5%-20% would have improved your risk adjusted returns.
If you’re not doing either of the above then you’re basically just throwing darts aren’t you?
The difference with a stock that doesn’t pay dividend, is that the business can still make money each year. That money gets added to the value of the business.
Gold doesn’t generate money. Gold needs a greater fool.
From an investor perspective the fact that a business generates money is essentially irrelevant if it doesn’t pay dividends other than the fact that it might be an input to your prediction model.
Item A: A piece of paper that represents notional ownership of a business whose value is determined by what everyone thinks about that business.
Item B: A piece of paper that represents notional ownership of a block of metal stored in someone’s warehouse whose value is determined by what everyone thinks about that piece of metal.
So if we’re trading, it really doesn’t matter which piece of paper we buy as long as we feel we have a good predictive model.
If we’re not trading, then it really doesn’t matter which piece of paper we buy as long as we feel the effect on our portfolio will be positive due to the item’s expected return, correlation and standard deviation (though personally I prefer semi-deviation).
If you’re not a trader and not using some form of MPT, what are you doing exactly?
Some good points made by all. However, your responses have diverted well away from my original point:
Is gold a SAFE HAVEN? It of course depends on your definition of a safe haven, but I think most peoples’ would be “a virtual certainty you will get your money back” (to put it in terms your average intelligent layperson would likely use)
Gold may indeed be a great hedge, have a negative correlation to real interest rates and have improved the risk-adjusted returns of a diversified portfolio over the past 40 years, but its not a safe haven!
(How much of a safe haven is it to those who bought it a few months ago?)
I don’t think there is such a thing as a “safe haven” since all assets change in value with respect to other assets over time. That said gold and long dated treasuries are good panic insurance if you are willing to trade some equity upside for better risk control.
Historically speaking, gold has been a commodity of value for over 5000 years…… That’s a pretty good run, dontcha think?
I always wonder if a post with the words “gold” and “greater fool” thematically linked is sour grapes.
I’m holding my hedge. Collapse? Really? Is that what that was?
Seemed like a mere blip on the way to higher valuation.
Guess we’ll see, won’t we?
Sorry, meant a mere “buying opportunity” on the way to higher valuation.
Is she still a minor?
gold will need to break below 1300 to be in “bear” mode. It’s very bullish for gold if it doesn’t break below 1500 in next three month.
Monetary theory and short term gold market movements aside, why are central banks and treasuries around the world still net buyers of gold? Better yet, why do they even still hold onto the stuff?
Understand that question, and you realize the rest of the gold debate is just noise.
If it’s good enough for the world’s central banks and treasuries, it’s good enough for me.
Which, by that reasoning, meant you were selling gold along with central banks in 2000, because that was good enough for them………..right at the lows for the decades…. OR, that buying up MBS in 2008 filled with subprimes is a good idea for you, or that lending euros while accepting bonds from insolvent countries as collateral is good enough……….. Sometimes the generals in the war do not make very good choices……….. And sometimes, their choices are NOT particularly aligned with your best interests. I think your reasoning is a bit shaky (personal opinion).
I understand your argument, and it is a common mistake to view history in such small isolated periods. Rather, one needs to view history on a much larger scale to understand what is going on. From Bretton Woods, 1944, to today.
What banks sold gold in the 2000 period? Why? What banks didn’t and started accumulating? Why? You will notice a geopolitical development if you know the answers to those questions.
The purchases of MBS on an unprecedented scale, not surprisingly, was done by the one bank that fears gold the most – yet that same nation’s Treasury still holds onto gold – the most official gold reserves in the world! There’s a reason for that.
Since 1971, the global economy began functioning on a US Treasury debt based system. Other nations followed suit and tried to mimic that system – the Euro comes to mind. These developments in turn spurred the FIRE economy and in turn, the need for global wage arbitrage to tame inflation and to further fuel the debt based asset valuation FIRE economy. Imbalances in global trade led to debt recycling partnerships that are unsustainable. That system is collapsing right now, in real time.
What comes next? I understand the MMT argument. But we can’t all MMT our way out of this at the same time. Someone here once said something very significant once: under MMT everybody gets a job and goes out and buys a gallon of gasoline.
At the end of the day, there are real resources that are being sold and bought around the world. We use money for those transactions. As the system deteriorates, competition for those resources goes from markets to military use. Hence the upsurge in resource wars, which in turn strengthens gold.
It’s very complicated, but one can not view gold as a market technician would, or an Austrian for that matter. This has nothing to do with the best economic theory, if there is such a thing. One needs to look at resources (peak conventional oil), geopolitics, history, monetary theory, etc… you get a decent grip on all those, you synthesize all that info, and you get a theory.
JMHO.
Central banks have infinite money, I wouldn’t trade necessarily by taking the same positions like them. Just like you don’t buy MBS just because they do.
See what I wrote above. I think many economists and market analysts forget the X factor in their analysis: Realpolitik and how it is practiced globally. It’s more than just about markets and money.
I agree with your view, but is very important the old line: markets can stay irrational longer that you can stay solvent.
Central banks and governments to a big point can ignore this (this is arguably, but we could say that at least they can for a very long time), in fact they can create trends and try to influence, manipulate or control the economy. But as individuals or institutional investors we can’t do the same (see Paulson funds… dropping sharply).
In the ends is always about the same recurrent discussion in this and other webs: it’s about timeframe, it’s about timing, and it’s about risk. I don’t discourage a small position in physical (not paper) gold and holding it even if it’s falls by 90%, but if you are willing to increase your allocation or leverage yourself through the paper market you should be very careful and shouldn’t act depending on what central banks do.
And talking about CB’s, there are nations which are expanding their money supply (and credit) very fast because of strong growth, with these trends going the demand for gold from these nations and CB’s will keep going. Take in mind that relative to more developed nations the gold stock (being fairly stable in these nations) they have is rather small. But if money supply growth stagnates because of growth stagnation because of these secular trends (which could take decades to develop anyway) the demand for gold will also fall.
Low growth (or no growth) has a deflationary effect in all commodities, even if these are scarce, because scarcity is a function of supply and demand. With demand destruction prices ease. This biflationary period may be pretty much characterized by this trend of high inflation/disinflation/deflation recurrent cycles during years.
Good luck with accumulating gold under this paradigm at the peak of the cycle, effectively eroding your capital for good.
I don’t know if today I would invest in gold the way I did a few years ago. I probably would still buy some, but not as large a position as I started with a while back. So I have been heavily vested in it for a few years. Thus, it has done very well for me. Furthermore, I have moved from the US to Europe recently, and instead of playing the dollar-euro game, I bought gold. I am also living in a country which may be booted out of the Euro – so gold has been an insurance of different sorts for my unique situation.
So for me it has worked out very well. It has been a great currency play – converting Dollars to gold a few years back instead of Euros. And it has also been a great source of insurance.
Nonetheless, I am not blinded by gold either as some goldbugs are. I am in the process of selling some gold to start a business. That’s a no-brainer, IMO.
But I will never sell all my gold, at least not yet. I will sell just before government confiscation may likely occur – likely thru a windfall tax of sorts.
I do believe that gold will break out of this steady trend eventually. However, it will not be the kind of world I would prefer to live in.
I do not look forward to that sharp rise in the gold price. Unfortunately, I believe it is going to happen.
Sounds like an argument for oil, not gold. You can’t eat gold, you can’t run your car on it, you can’t shoot anyone trying to break into your bunker.
Cullen – you haven’t weighed in – what are your thoughts on gold over the next year?
You say:
“You can’t eat gold, you can’t run your car on it, you can’t shoot anyone trying to break into your bunker.”
My response:
That’s exactly the point. It’s not consumed. That’s why historically it was one of the first means of exchange outside of the barter system. It can’t be consumed, and it can be created. I’m not saying this as some Austrian that would be pro gold. I am just recognizing those qualities gold has – it is those qualities that give it its unique position in the vaults of Central Banks and Treasuries.
I always felt that gold was little more then an alternative currency. As long as you had complete faith in the long term staying power of whatever currency you currently use most people might look upon gold as little more then an expensive paperweight which might only become highly valuable in the event of some ten sigma event. So maybe you have a percent or two of your assets invested in gold – just in case. However, when people begin to question the longer term value of their currency that perceived value of gold could begin to change. It really doesn’t matter if you believe these newfound concerns about their currency, over the long run, turn out to be correct or not. All that matters is that more and more people are beginning to become concerned and since gold has been recognized as a form of money for thousands of years it only makes sense that gold would be the go to asset for more and more people. We’ll find out if those concerns are justified or not in the fullness of time. In the meantime we take our money and place our bets.
If you read the comments of many of the somewhat more recent buyers of gold it pretty well bears out what I just wrote. Be it someone like David Einhorn or perhaps someone more conservative like Jean- Marie Evillard many have indicated that they are becoming increasingly concerned and are not quite sure how these massive deficits will ultimately play out.
Why do we have to talk of gold as an investment? It should really be viewed as a substitute for holding cash during times of currency devaluation. Can’t eat it? Who cares , You can’t eat cash either.
The US has openly admitted they will seek to debase the dollar so which would you rather hold if no strong productive alternative.
An ounce of gold would fill the wagon with food in the 1800s and will fill an suv today.
That said, when you’re more comfortable that were not facing a global systemic collapse (even Soros believes may happen) then I’ll take Buffet’s advice over everyone on this board and take all the gold in the world and buy 8 Exxon Mobiles and all the farmland in the US.
And that is my point – if you’re really that concerned you ought to buy a farm. Mad Max wasn’t fighting over gold, and gold would have gotten him next to nothing in return. Now ammo and oil – they’ll hold their value if the s%#* hits the fan, and shy of that farm land will keep you fed what you produce will trade in any currency at full value.
Gold may not drop in half in the next year, but it will eventually. Just because gold was a good investment over the past decade says nothing about the next decade. If I were on the doomsday camp that so many gold bugs are in I’d trade all my gold for farm land.
Everything you have written above has been said about gold many times over the past ten years.
If, as I assume, gold enters the global monetary system once again for trade purposes, then its value may not drop. If governments were to go back to a gold standard, they would not peg their currencies below the going market price of gold, as that would be deflationary. This scenario is much, much more likely than a mad max scenario. Trade will never disappear, only the methods change.
The US would have to consent to a return to the gold standard, it couldn’t be done without them. An international gold standard needs international agreements to function. Going back to the gold standard would be like going 60 years back into the past – basically it’s not even feasible. The gold standard was always a sham anyway. Countries will always leave a gold standard when it is no longer in their interest. All of this austrian-style mythologising of gold is ridiculous.
The gold ‘price’ is irrelevant at the moment, as it is manipulated by futures markets and other derivatives.
If you trust governments to run their affairs in a prudent manner, maintaining the value of their currencies, then you won’t need gold.
If you trust banks to mark all of their losses to market, then you won’t need gold.
If you want to hold wealth with no counterparty risk, then perhaps you will own some physical gold.