- Gold and silver are historically undervalued, in inflation adjusted terms, since 1970.
- Gold ounces per capita is trading below 1950s numbers which means there is less available physical ounces per person now than almost 70 years ago.
- Bond and stock market weakness are pointing to a recession. Crashes in both markets will likely be needed to break the spot price speculative nonsense which drives current metals prices.
- 2019 could very well be the year Westerners realize that gold and silver are the ultimate safe havens in times of turmoil.
In an annual LMBA meeting in Boston on Tuesday, delegates were polled on the future price of gold in October of 2019 and came away with a $1532 target. They also predicted higher prices for silver, platinum, and palladium as well. What would be the catalysts for such a bullish move in the precious metals?
From an inflation-adjusted perspective, using 1980-era government inflation standards, gold and silver are now priced at 50 year lows. The calculation was performed by career economist John Williams at Shadowstats, whose service provides alternate measures for inflation, GDP, unemployment, and money supply statistics using traditional government standards.
The calculations provide more accurate period to period comparisons on these commonly cited government economic data points by eliminating many of the formulaic adjustments added over time to the metrics.
As a result of these calculations, both gold and silver appear to be cheaper than their 1970s prices in real terms. Meaning, gold and silver would buy (or could be exchanged for) slightly more goods in the market now than they would have in 1970.
In contrast, the overall price inflation in the economy, measured by CPI, has increased by 668% over the same time period per the BLS. That is not even considering the adjustments made to this metric over time which have reduced the overall impact of CPI measured since the standards in place began to change in the 80s.
Source: BLS CPI Inflation Calculator
Considering that gold ounces per capita across the world declined from 1950 to 1989, and has not caught up to the 1950 peak since, one would think that gold’s value to the investor would have become more precious over the last 68 years and not less so. But in real terms, gold is as cheap as it was in 1970 during a declining period of available gold ounces available per living human and a simultaneous steady rise in the prices of other goods and services in the market.
It would seem that gold may have fallen out of favor to other financial instruments and currencies over time, especially in Western countries where at times gold ownership has been either outlawed or strongly limited at certain times of financial crisis, and governments used those reserves to address underlying economic weaknesses.
While the price target set out by the LBMA delegates of $1532 is certainly plausible in the near future, I suspect the price is merely a guess based on perceptions of existing financial volatility in the emerging market currencies and stock markets, along with the recent rise in rates of US Treasuries.
In truth the final price for gold and silver are unknown. The spot paper gold price, mostly determined by paper trading for those speculators that want exposure to price movements but have no legitimate hedge risk in the metals, has largely range traded the last two years from 1130 to 1380. But speculators aren’t looking at the long term fundamentals for metals they don’t own or have real exposure to. They are playing the spot price movements in anticipation of shorter term returns.
While largely being bullish on gold, non-commercial traders recently turned net short in their net speculative positions for the first time in years, while currently sitting slightly net long. Speculators are expecting gold prices to fall or hold relatively steady, but for what reason?
The bull stock market appears to be coming to an end for several reasons. So far, Q3 earnings are disappointing on revenues even though margins seem to be hitting the mark. Second, we have experienced two corrections already in 2018 which could be signaling the end of the current aging bull market in technical terms.
US companies have used ultra low rates to increase their leverage 40% above 2008 highs and have used the money on share buybacks and dividends, with less overall, as a percentage, going to CAPEX for expansion. Even given the monetary expansion available to companies, dividends are near historic lows per the Forbes article referenced above.
Bond yields are rising which has likely ended the multi-decade debt bull market. Inflation has ticked up and the Fed is steadily raising interest rates and reducing liquidity which will likely reduce economic expansion. All of these data points are bullish for gold and silver in the medium to long term, especially considering they are trading at 48-year bargains in the spot paper markets where current prices have not adequately risen with general increases in price inflation over that time frame.
All of this suggests that gold and silver are at cyclical low valuations and are about to experience another bull run. However, given that spot paper speculative trading dominates the daily price movements, it may take breaking of the financial markets for gold and silver prices to return to the real, inflation adjusted values. At some point, I expect physical market gold and silver prices to diverge from the spot prices and investors in paper gold and silver products will rue their decision not to hold the physical metals instead.
Where the stock and bond markets go in the last two months of 2018 may likely determine where gold and silver are headed. Given that the stock boom was largely fueled by cheap debt money whose trend has just reversed, I see a bond market rout preceding a larger stock market crash. Both will precipitate gold and silver markets reverting to their true historic valuations and the current spot market will no longer matter to investors.
Will that happen in 2019 as LBMA members predictions may be suggesting? Fundamental market signs are beginning to point in that direction.