Gold Price Model Says Gold Still Undervalued

Posted on  by Gary Christenson

Gold hit a price low of approximately $1,140 in early November 2014. Since then it has rallied dramatically, possibly because of global fears about the financial system, the Swiss National Bank removing its peg to the Euro, more QE, escalating war in the Ukraine, or simply that gold prices were over-extended and ready to rally.
In my opinion gold reached an important low in November, and in spite of a rising dollar, has rallied since then in dollar terms, and even more in most other fiat currencies.
However gold is still undervalued by about 16% according to my long-term empirical model. Further, gold has potential to rally far higher and is likely to overshoot the 2014 equilibrium price of $1,527 calculated by the gold model.  Gold could easily reach $2,000 by late 2015 or 2016.
Examine the graph of annual gold prices since 1971 versus the calculated gold prices from the empirical model.  The correlation, as calculated by Excel, is 0.98 for 1971 – 2014.

My empirical model begins in 1971 when President Nixon “temporarily closed the gold window,” allowed the dollar to float freely, and enabled currency in circulation to increase rapidly. The model uses only three macro-economic variables, which are discussed in detail in my book, “Gold Value and Gold Prices From 1971 – 2021”.

What does the model indicate for the next several years?

Since the model is based on two dominant variables and one minor variable we can ask how those two dominant variables are likely to change in the future. National debt is the first variable and has increased since 1913 at about 9% per year. Since 2008 it has risen approximately 10.0% per year. Based on one hundred years of history and current politics, we can safely assume that the U.S. national debt will continue rising, and that expenses for the United States government will substantially exceed revenues for the foreseeable future.
The second variable is the price of crude oil which has fallen dramatically in the last 5 months. Many people have suggested that the price of crude will remain low for the balance of the decade and perhaps far longer because of weakening demand. While I understand the weak demand argument, I believe that the price of crude will erratically rise along with total currency in circulation and total debt, as it has since 1971.
Central banks will use their primary tools – monetizing bonds or “printing money” – to overcome deflationary influences in the global economic system. Japan has given us an indication of what to expect from central banks in Europe, the United States and Great Britain. In my opinion the current low price of crude, whether due to diminishing demand or price manipulation, is temporary and will increase considerably due to the inevitable rise in global debt and currency in circulation.
The two variables, debt and crude oil, will dominate in the calculation for future gold prices.  My conclusion is that gold is still undervalued and that my model projects substantially higher prices for gold through the balance of the decade. The model uses plausible assumptions about increasing debt and the price of crude oil over the next six years and indicates that $5,000 gold and possibly $10,000 gold are reasonable and should be expected.  Please note that certain events, such as hyperinflation in the United States, a nuclear war, or even a widening Ukrainian war could easily push the price of gold (in U. S. dollars) far higher than the model indicates.
If central banks fail in their efforts to increase inflation, and the world devolves into a global deflationary depression and possibly a nuclear winter, the dollar price of gold could be unpredictable, but the purchasing power of gold will almost certainly increase as paper assets and fiat currencies crash and burn in a deflationary depression.
In my opinion the deflationary depression scenario seems far less likely given that central banks have a one hundred year history demonstrating both their willingness and ability to devalue their currencies, create inflation, and to drastically increase the total debt and currency in circulation.

Conclusions:

The price of gold closed on Friday, January 16 at approximately $1,276. My model indicates that price is still too low by about 16% and therefore the probability is that the price of gold will rally substantially in the next several years.

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A Mine is a Terrible Thing to Waste Bob Moriarty

A Mine is a Terrible Thing to Waste

Bob Moriarty

I was on the way to the field last week when the news came out about the surprise Swiss move to sever the tie with the price of the Euro. I suspect that move will be identified as the beginning of the end. In a matter of minutes, the value of the Swiss Franc rocketed higher by 30%. Other than perhaps Zimbabwe, I don’t think I have ever heard of any currency changing value by 30% in minutes. The Swiss Franc settled up some 15% for the day.
Many years ago I wrote a short piece when Enron collapsed I called “The End of the World. . . as we know it.” In it I bemoaned the danger inherent in having the incredible sum of $100 trillion in derivatives. Boy did I get it wrong. Derivatives made it as high as $710 trillion and now stand at a still incredible $691.492 trillion dollars. When that firecracker goes bang, it will rattle the windows in the houses on Orion’s Belt. We have a world economy of under $70 trillion, derivatives are a ticking time bomb and one went off last week.
According to the BIS, the derivatives on the Swiss Franc totaled $3.95 trillion in the last reporting period. A 30% loss would cost some poor sods $1.185 trillion, 15% loss would be a still hefty near $600 billion. Hedge funds are starting to pop like an overheated bag of popcorn. This could be the end.
It came to me that perhaps an investment  in silver and gold might not be amiss according to Exter’s Triangle. I recognized as early as 2002 that governments would attempt to fiddle with the economy when derivatives blew up. I also understood they are powerless.
The project I was going to see used to be the 2nd largest silver mine in Arizona. From discovery in 1892 until WW II caused the mine to shutter in 1942, the Commonwealth Silver mine produced about 16 million ounces of silver and 138,000 ounces of gold. The silver mines around Tombstone produced more silver however; we will have a drill rig on the ground of the White House before anyone allows mining in Tombstone.
Management of the privately held Commonwealth Silver and Gold optioned the Commonwealth Mine in late 2010 from another private company. They completed the purchase in 2011 right as silver topped. Actually their timing couldn’t have been any better, they were able to raise $9.5 million at the top and have watched as their brethren silver companies cratered as silver dropped over 70%. They came close to going public several times but the market wasn’t right. Meanwhile they did put the money raised into the ground.
The company filed an updated 43-101 and PEA study in April of 2014. It shows 389,000 ounce of gold and 32 million ounces of silver in M&I and an additional 67,900 ounces of gold and 4 million ounces of silver in the inferred category with about 1.05 million ounces of gold equivalent in total. At $1350 gold and $25 silver the project showed a blistering 58% IRR at a 5% discount rate and NPV of over $101 million. Capex would require about $27 million to production.
The numbers in the PEA are a bit optimistic for today’s prices but given the crash in energy prices, actually the NPV and IRR would be a lot higher today.
A mine is a terrible thing to waste and this mine will be back in production. It’s gone through several owners since closing in 1942 and come close to production several times. With current management in place, it will go public with more favorable prices. The management team has expanded the footprint of the project and believes the mine has district potential. Since the existing mine is on patented ground, permitting could be done in as little as two years. With more time and more drilling, the resource could be expanded and more ground permitted for mining on the surrounding BLM ground.

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Gold's New Friend: The Swiss Franc Stewart Thomson

Gold's New Friend: The Swiss Franc!

1. While I predicted a huge rally in gold would usher in the new year of 2015 in a spectacular way, the top bank economists have failed again.
   
   
2. Most of them predicted, “No rally for gold!” Their dire predictions in 2014 all failed to materialize, and this year they are off to an even worse start.
   
   
3. The bank economists, quite frankly, look ridiculous. They clearly need to reset their thinking about the powerful demand coming from billions of Chinese and Indian citizens, or they risk turning themselves into clownish figurines.
   
   
4. The daily chart for gold looks spectacular. Please . Note all the buy-side support lines that I’ve highlighted on this chart.
   
   
5. For another look at that daily chart, please . Note the green trend line. The breakout above that line will attract a large number of technicians and momentum-oriented hedge funds.
   
   
6. The commercial traders are shorting gold into this strength, but I suspect they may end up booking heavy losses on this trade. They don’t lose often, but they appear to be in some serious trouble here.
   
   
7. Please. Chinese hedge funds have emerged as a new potential threat, to the Western bank dominance of the world’s metals markets.
   
   
8. It’s impossible to know if these giant Chinese funds are running long gold/short copper trades of size. If they are, the Western banks may decide to fold on their short gold positions, rather than risk even bigger losses.

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Gold Market Update Clive Maund

Gold Market Update

originally published 
 
Nothing has been done to address the structural inadequecies and distortions that lead to the 2008 financial crisis – instead our leaders have resorted to the procrastination made possible by turning to drugs, specifically Quantitative Easing, which has enabled them to clamp interest rates at 0 to prevent the already unserviceable debt load from compounding out of sight. Spearheaded by the US, this money printing policy has now become standard practice around the world, with Europe and Japan following suit in a big way. The notion put about that all this newly printed money can somehow be contained within banks is nonsense as demonstrated by the soaring prices of stockmarkets in developing markets until recently and in various asset bubbles like the boiling London and New York Real Estate markets.
This global procrastination worked until recently, but now this reckless and economically suicidal policy is visibly coming apart at the seams – it didn’t work for Robert Mugabe’s Zimbabwe and it won’t for anyone else either because it is a flawed scheme to avoid facing up to the consequences and fallout from one’s actions. The only reason that the ship hasn’t sunk so far is complex financial engineering that has enabled the rot at the heart of the system to be obfuscated for as long as possible, but now the markets have gotten control of the ball and things look set to get ugly fast.
Of course, no-one really wants them to grasp the nettle and seriously attempt to rectify the mistakes of the past, because they have left it so late to do this that it would lead to an earth shaking deflationary implosion that would economically lay waste most of the planet. This being so they have no choice but to continue with more of the same, and any attempt by the Fed to resist the inevitable QE4 will lead to the markets getting it in an arm lock and forcing it to comply and cough up. This process has already started as deflationary forces have been gaining ascendency. A symptom of these gathering deflationary forces is the crash in  and the failure of key support in copper about a week ago, which threatens to crash too unless something is done. The big question is when will they (the Fed) capitulate and reverse course – will they do so immediately to keep the game in play, or will they let the US stockmarkets crash first, so that they can use it as a justification for their actions? Europe, which is already being ravaged by deflation, has already surrendered and is preparing to do massive QE, which is why the euro is so weak.
Last week we had the bombshell development of the Swiss abandoning their Franc peg to the euro. This was a development with grave implications. They know that this move will severely damage their exports and tourism industries, but they have done it because they realize that it is better to take to the lifeboats now than go down with the Titanic (the euro). This was a major vote of no confidence in the euro that has kicked out an important prop from under it – and it's nice to see the Swiss going back to their independent mountain ways – now all they have to do is kick out the international snoopers spying on bank accounts to restore the confidence of the global tax dodging community.

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Dollar’s Major Breakout and Gold’s Simultaneous Rally Przemyslaw Radomski

Gold & Silver Trading Alert
Dollar’s Major Breakout and Gold’s Simultaneous Rally

Przemyslaw Radomski

Briefly: In our opinion no speculative positions are currently justified from the risk/reward perspective. Being on the long side of the precious metals market with half of the long-term investment capital seems justified from the risk/reward perspective.
Gold soared on Friday once again and so did the USD Index. It was yet another day of the two rallying together, which is a very bullish development. What’s next?
We generally don’t post alerts when the markets are closed, but we decided to update you this time anyway, as quite a lot happened last week and we thought that posting a comment today would be useful to you.
The medium-term outlook has improved greatly, but not based on what most market participants (individual investors, mutual- and gold hedge funds, etc.) think. The most recent move higher is not what improved it – we have already seen significant – yet counter-trend – rallies in the past years, which didn’t change the medium-term trend, so why should this one be any different? The real difference comes from the situation in the gold-USD link and the gold link to the bond market. Let’s start today’s alert with the USD Index (charts courtesy of http://stockcharts.com).

The USD Index moved and – more importantly – closed the week above the resistance level. We have just seen a breakout.
The USD Index had been trading below the resistance for some time and it paused at the cyclical turning point. Perhaps the pause was the effect that the turning point had – the trend might have been too strong for this signal to generate a decline.
The breakout has not yet been verified, but a weekly close above the resistance (quite visibly above it) is quite meaningful. The situation is not very bullish yet, but it’s more bullish than not at this time. The next resistance is slightly above the 96 level, so there’s quite significant upside potential.
The above has bearish implications for the gold market, however, given gold’s recent ability to rally along with the USD, we could expect the bearish implications to be delayed. Let’s check the signal from the bond market.

Let’s be clear – the above chart doesn’t have meaningful short-term implications. It covers many years to filter-out the short-term price sings and focus on the main trends. The relationships between major economic indicators, such as gold and bond prices, don’t have to work in the short term – they are not technical tools. The way the two markets react to each other can tell us something about the major trends, though.
We divided the entire period into 4 sub-periods. Before mid-2011 both gold and the ratio of 20-year to 1-year bond yields rallied. Then they both declined for about a year. After that the ratio moved higher, while gold declined. The early divergence was a bearish sign indicating a major decline.
In the final weeks of 2014 we saw something different. The gold market finally reacted to the moves in the bond market. The huge decline in the ratio wasn’t able to push gold price lower but gold reacted visibly to a move up in the ratio. They are both rallying together this year. This suggests that the next big change in the precious metals market “is here” and that it was a very good decision to get partly back on the long side of the market with the long-term investments a few tens of dollars ago in the case of gold.
On the above chart, we’ve marked the only situation that was similar to the current one – the 2012 bottom. Both the ratio and gold bottomed after a visible decline and then started to rally together. Back then it meant that a rather significant rally would follow in gold. However, there was some back and forth trading before gold moved much higher.
Will gold decline or rally shortly?

Gold moved visibly higher above the declining resistance line and ended the session close to the 38.2% Fibonacci retracement level based on the 2001 – 2011 rally, which was a significant support at the time and now could provide resistance. The next significant resistance is at about $1,300, which is not only a psychologically important number (being a round one) – it’s also where the rising very long-term resistance line is currently located.
Please note that the long-term cyclical turning point is very close. The previous turning point was due in mid-2013 and the major bottom materialized several weeks after that point. Perhaps it will be the case once again, which means that we could see a bottom after April or so. It’s not a very strong bearish factor, but we’d say it’s something worth keeping in mind – especially given the breaking-out USD Index.

Gold broke above the medium-term resistance line and several other resistance levels, but this move has not been verified, and if the USD Index keeps rallying, it might not be verified. On the other hand, the self-similar pattern that we marked on the above chart in green and red remains in place, which has bullish implications as back in Feb. 2014 gold rallied even higher before stopping.
The RSI indicator just moved above 70, which means that the rally could pause or stop shortly. In June 2013 gold kept rallying for a few more weeks, but it didn’t move much higher. We could be in this type of situation once again.

In our previous alert, we wrote the following:
Because of the rising red support line, the Dow to gold ratio chart tells us that this ratio could move lower, but it’s not likely to move much lower before stopping or pausing. This means that gold could move higher but not likely much higher before stopping or pausing.
Gold has indeed moved higher and the ratio has moved lower, reaching the support line. The implications are bullish for the ratio and bearish for gold.

Silver moved back slightly above the very long-term, rising resistance line, which seems bullish, but let’s keep in mind that silver tends to “fake out” instead of “breaking out”. Breakouts are often signs of a looming decline, which makes us skeptical toward this “traditionally bullish” development.

Gold stocks corrected about half of their recent decline, but the strongest resistance was not reached. The 3 important resistance levels intersect close to the 210 level: the 61.8% Fibonacci retracement, the 50-week moving average, and – most importantly – the declining long-term resistance line. If gold stocks manage to break and confirm the breakout above this level, it might serve as a confirmation that another major upswing is underway. For now, the current rally looks similar to the corrections that saw in July 2013, in late-2013 to early-2014, and in June 2014.
Summing up, while there are some signs that this rally might be the beginning of another major upleg in the precious metals market, it’s still more likely than not that it’s just a correction. Gold seems to be once again responding very positively to the signs from the bond market, but if the USD Index keeps rallying, the yellow metal might give up its recent gains and decline once again. Whether it declines significantly or not, it could be the case that we’re just one decline away from the final bottom before the next major rally.
That’s the clearest thing that we can say based on the current situation in many markets. Things are not as clear regarding the very short-term outlook. Gold could decline based on the USD’s strength or simply because the short-term breakouts have not been confirmed yet. It could move higher based on the self-similar pattern that has been working very well in the recent weeks. It seems that “when in doubt, stay out” is a justified approach at this time. Things might become clearer in the coming days or weeks. We’ll keep you – our subscribers – informed.

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FYI Martin Luther King Holiday Schedule Ron Nicklas

Martin Luther King Day  Holiday Schedule
 
PennTrade


Dear PennTrader,

All US markets will be closed on Monday, January 19, for Martin Luther King Day.

Canadian markets will not close, so PennTrade will remain open for your Canadian trades.

US markets will reopen on Tuesday and it will again be business as usual.

Thank you for using PennTrade.
Ron Nicklas
President

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BBBBB This past week in gold Jack Chan

This past week in gold

Jack Chan

GLD – on buy signal.

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SLV – on buy signal.
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GDX – on buy signal.
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XGD.TO – on buy signal.
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CEF – on buy signal.

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Gold has poked above the 200ema again, prompting breakout calls from some analysts. In a bear market, time is ripe for short sellers to return at current level. And if gold has bottomed and a new bull market is born, price action and COT data will confirm that over the next few weeks.
Summary
Long term – on major sell signal since Mar 2012 when $HUI was at 550.
Short term – on buy signals.
Gold sector cycle – up as of 11/14.
A bear market rally is in progress.
COT data suggests lower metal prices overall going forward.

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Swiss National Bank Intrigue Mario Innecco

Swiss National Bank Intrigue

Mario Innecco


Despite the SNB's campaigning against the Swiss Gold Initiative late in 2014 and its assertion that a YES vote would interfere with the bank's policy of capping the franc versus the euro the financial world was rocked by the equivalent of a major earthquake on the 15th of January, 2015 as the SNB decided to do a U-turn and abandon the cap on the franc versus the euro.
We all know by now what happened to the Swiss franc on Thursday so I will focus on why I think the SNB shocked the financial world and in the process wiped out many highly leveraged foreign exchange traders and speculators. Why would the SNB change a policy that it had been adamantly protecting just recently?
I personally think that the continued weakness of the euro versus the dollar has put a great deal of pressure on the SNB as it continued to keep the cap on the franc as the dollar kept rising versus the euro. Even though the Swiss Gold Initiative failed to pass last November there has been political pressure on the SNB to stop inflating its balance sheet.
As a result it is my opinion that the SNB, not expecting the euro weakness of these last few months, decided to get out of a losing trade while it could. By lifting the the cap the SNB is basically saying it does not want to buy any more euros but at the same time it has hundreds of billions of euro paper on its balance sheet. With the ECB expected to announce a new QE program on Thursday the 22nd of January, 2015 I expect the SNB to be a keen seller of its euro assets in the months to come. What better way to sell its euro denominated government paper!
My expectation is that just like FDR the SNB will use its proceeds from selling its euro assets to buy gold. Back in the early 1930s the dollar was the Swiss franc of its day as European capital fled a failing financial system to the relative safety of the then gold backed dollar. This exodus from European currencies to the dollar exacerbated the deflationary economic environment in the U.S. FDR called a bank holiday in 1933 as a result and subsequently devalued the dollar by 75% by raising the official gold price from $20.67 to $35 in January of 1934.
By buying gold the SNB will alleviate the deflationary pressure that a strong currency brings. What better way to unload its mountain of euro assets and at the same time assuage its political foes at home.

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The Doughty Swiss NYSun

The Doughty Swiss

Congratulations to the doughty Swiss, we say. The decision of their central bank to remove the cap on its currency, allowing it to soar against the Euro, is causing the foreign exchnge markets to be struck with the dreaded turbulence. It may well make things difficult for Switzerland in the short run. But it was a vote of no confidence in the quantitative easing that the European Central Bank is about to undertake. It may have put some starch into the Germans, to whom the ECB just bowed by saying it will do its quantitative easing without making taxpayers responsible for losses.

All other virtues of this drama aside, what a paroxysm of panic it has produced at the Financial Times, which has declared that “Thursday’s action in the Swiss franc defies the reach of hyperbole.” We haven’t heard such a primal scream from the FT since Prime Minister Thatcher cut taxes (at that juncture the Wall Street Journal consoled its competitor with an editorial called “Cheer Up, Lads”). The FT calls the Swiss National Bank’s move “a poor advertisement for Swiss reliability.” It suggests the Swiss demarche is “all the more remarkable” because the currency is “prized for its stability.”
We’re not sure “stability” is the word we’d have used for either the Swiss franc or the euro, or, for that matter, the dollar. The latter has lost more than 78% of its value since the start of the century (this morning it was worth but a 1,280th of an ounce of gold). A long-term chart of the Swiss franc shows that it (and the Euro) have kept pace with the dollar in this decline. Gold hasn’t changed its policies once during this period. Its quantity hasn’t changed a whole lot; it’s still inert; and hasn’t anybody found any world-shaking new industrial uses for the silent money. Not even the FT can blame the instability on gold.
The bitter truth is that all the sturm and drang over the Swiss franc is a feature of the age of fiat money. The exclamations of horror that have greeted the decision of one tiny country to stop playing the same game as the bigger countries testify to nothing so much as the absurdity of the fiat system. We’ve never understood the virtues of any country running down the value of its money. We’ve long felt that one country or another — Switzerland, Israel, Britain . . . someone — just ought to stop issuing its currency by fiat and return to a classical system. Wouldn’t it be something if it turns out that Switzerland has taken the first step.

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Fallout From the Swiss is a Dress Rehearsal for the Dollar

The move in the Swiss was extraordinary because of the massive short-Swiss through loans and their own buying of Euros. The audacity of the IMF to even state they will look into this as if they have any such authority or credibility is just stunning. They want the inside info so they can line their own pockets along with friends.
The British brokerage house  Alpari (UK) Limited has entered insolvency due to the Swiss move. There is no way a Broker can limit the risk of an account when something moves 30%. There is more fallout to come. Just keep in mind this will happen when the dollar rises for there is even a larger short-dollar position around the globe. What we have seen in the Swiss will be the dress rehearsal for the dollar.

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