Feb 032016

At the beginning of each year the London Bullion Market Association (LBMA) polls a range of respected precious metals analysts in the large banks and independent consultancies for their forecasts for metal prices for the coming year. This year contributors are “predicting price increases across the board for all four metals”. Their forecasts for the average price during 2016 are:

Gold – $1,103, ranging from $978 to $1,231
Silver – $14.74, ranging from $12.63 to $16.78
Platinum – $911, ranging from $748 to $1,076
Palladium – $568, ranging from $413 to $674

LBMA forecasts have been quite accurate historically. The charts below show the actual average gold price each year as a line against the lowest (bottom of red bar), highest (top of green bar) and average of the forecasts (where red and green bars meet). Note that these charts are of the yearly average, so during 2016 prices will move around these figures (see the survey for more detail).


This year the range of forecasts for gold is quite tight, indicating more consensus or confidence amongst the analysts about gold. The most pessimistic analyst is René Hochreiter who forecasts a low for gold during the year of $850 while Martin Murenbeeld sees a high of $1,375.

The LBMA analysts are less accurate in the case of silver. This year their range is wider but overall see a downtrend. Bernard Dahdah sees a low for silver of $11.00 with Philip Newman seeing silver getting as high as $19.50 during 2016.


In the chart below I’ve worked out an approximate gold:silver ratio forecasts for those analyst who forecasted both gold and silver. It is not exactly the same as an actual ratio forecast because it is just dividing an average by an average, but as gold and silver tend to move together it is a reasonable approximation.


In line with the tight ranges for gold and silver, the LBMA analysts don’t see much change in the ratio for 2016 and certainly not back down to long term averages around 50.

Jan 142016

Even though investors are constantly told in disclaimer boilerplate that “past performance is no guarantee of future performance” the siren call of historical price charts is hard to resist. In the case of gold and silver, it is impossible to avoid projecting the 1970s bull market on today’s price action due to its epic nature and perfect representation of Dr. Jean-Paul Rodrigue’s bubble behaviour.

Gold bulls would argue that economies and financial systems have not been healed and accordingly the gold price top in 2011 was only a mid-cycle peak similar to the peak of $197.50 in December 1974. In chart form this claim manifests as per below.


The claim looks strong based on the similar behaviour during the initial bull phase – excepting the area marked (1), which is OK as history is said to rhyme, not repeat – and the almost identical retracement in terms of size (50%) and relative duration.

The “relative” speaks to the weakness of this charting analogy as to fit the two time periods one has to “speed up” the 1970s – the recent gold market’s build up and retracement took about twice as long at the similar behaviour during the mid 1970s. Maybe the explanation for this is the greater degree of central bank market activities with QE etc to prevent financial market corrections (and corresponding gold market response).

Based on this chart projection, the current gold market is due for a new bull market as marked at (2) and while the 10:1 ratio will warm the hearts of gold holders with that giddy $9,000 scale on the right hand side of the chart, I would note that on this basis it will take around 5 years before gold reaches its previous $1,900 highs sometime in 2020.

Final point I would make is to emphasise the “rhyme, not repeat”. Note that the final price run involved two parabolic price phases, the first marked (4) at around $400 and then another to $850. My advice would be if you see a parabolic price move, sell – there is no guarantee that it will play out exactly the same this time and a 50% correction is reasonable on the other side of the bubble. The $4,000 in the hand could turn into $2,000 just to maybe get $8,000. While hopefully many are sagely nodding right now that they would be so happy with $4,000, the fact is at that time there will be many plausible arguments put forward that even higher prices are inevitable, just as there was when gold was running up to $1,900. But such is the stuff that bubble tops are made of.

Of course this would not be a trademark Bron balanced blog post without a dream-popping counter argument, as per the alternative chart contortion below.


Here we see a mid-bull cycle surge marked (1) but the financial crisis marked at (2) prevented a retracement and pushed gold on to its eventual high. On the downside we see a similar levitation/denial after the top before the price crashes and continues its depressing deflation.

Note that the timescales on this overlay are identical – a day in the 70s equals a day in the 00s, which is a factor in its favour. By this chart 2016 will continue to see gold fall down to circa $900 marked (3) before staging another run up over the next three years to around $1400 or thereabouts as marked at (4).

The logic behind this potential future is that while the financial system is hardly fixed and there will be risk events ahead that will drive money into gold, central banks have demonstrated a willingness to take action to prevent the sort of complete economic breakdown that would justify a $8,000 gold price.

Ultimately, which of these futures you subscribe to depends on whether you believe in the narrative that central banks are omnipotent. If you think they have fixed things and/or can hold it together, then sell the coming $1,400 blip. If you think it is still to unravel, then buy the $1,000 dip. Good luck either way.

Read this article in German at GoldSeiten.

Sep 032015

Back in July I said that “an investment in AUD gold may represent a reasonable bet” given that “the general consensus on the Australian dollar is that it will continue to weaken due to a poor economic outlook with commodity prices falling”.

Today, Australian media are reporting that the AUD/USD exchange rate will reach 0.60 by end of 2016. First is Deutsche Bank chief economist Adam Boyton quoted as saying that the dollar will keep falling to US60¢ by the end of 2016 and he “wouldn’t be surprised if the Australian dollar is printed with a ‘five’ handle in the next three years”. That article also says “Suncorp senior economist Darryl Conroy is also expecting the dollar to fall towards US50¢”. The Sydney Morning Herald was quoting AMP chief economist Shane Oliver as saying “he expects the dollar to reach US68¢ by the end of the year and slide to US60¢ throughout 2016”.

If the Australian exchange rate does fall to USD 0.60, then that puts a strong floor under the Australian gold price. The following conservative USD gold prices at that exchange rate equate to:

USD 800 = AUD 1,333
USD 1,000 = AUD 1,667
USD 1,200 = AUD 2,000

The chart below puts those moves into context.


USD 800 is the most pessimistic forecast of the mainstream gold analysts, and would represent an 18% fall in AUD terms from today at an 0.60 exchange rate. This is not an unrealistic scenario, as the effect of changes in the Australian exchange rate on the AUD gold price, if driven primarily by USD strength, will be counteracted by a fall in the USD gold price.

While the USD 800/FX 0.60 combination results in a big loss, it does need to be weighed up against the upside. I have spoken to some Australian investors who are expecting the Australian economy to fall into a recession and are thus expecting the exchange rate to weaken and house prices to fall, but for the USD gold price to rise at the same time on the back of weak Chinese and global economies. In that scenario, a conservative USD 1,500 gold price at 0.60 is AUD 2,500 per ounce. These investors are expecting a 40% reduction in average Australian house prices, which would bring to house price/gold ratio down to levels it has reached in previous recessions, as shown in the chart below.


As discussed earlier this week, their plan is to switch out of gold and into other hard assets. Ultimately it comes down to whether you think that the Australian dollar’s fall is going to be driven more by factors unique to Australia’s economy and thus the USD gold price will not necessarily fall at the same time, resulting in a surging AUD gold price.

Aug 242015

Richard Watson is a futurist and scenario planner I’ve been following for years. Each year he comes up with unique graphical representations of his thoughts on future trends (see here for an example) with a focus on technology. His latest takes a classic risk based approach (likelihood & consequence) and so is suited to gold which people run to when unexpected things happen. Consider this the intelligent person’s doomer list.

So of all the risks identified, what is Richard’s biggest worry:

“another global financial meltdown (far worse than last time due to increased debt levels, a lack of liquidity and the newly networked nature of fear). This could be triggered by rising US interest rates, although the actual trigger is irrelevant. There is so much stress built up in the system I believe almost anything could trigger a panic sell off. I suspect that QE won’t work again either, although one might argue that QE is itself a risk and should be on the map.”

Aug 192015

In response to a Craig Hemke comment that “the ability to convert fiat and stack physical metal at these depressed paper prices is a gift, not a disaster”, Chris Powell of GATA noted that “it would be a much more valuable gift for people in their 20s and 30s than for people in their 60s and 70s. Indeed, for the latter group it could look more like another ripoff.”

The response got me thinking about generational differences and the demographic cliff (see this Mauldin Economics article for a summary by Harry Dent about the demographic cliff). Harry’s work on demographics focuses on the generational life cycle in respect of spending patterns, which he says peaks at the age of 46. What I’m more interested in is the peak saving age, because this may give us some clues to gold demand going forward.

Harry says that “people save the most at age fifty‐four and have the highest net worth at age sixty‐four”. This fits in with his peak spending at 46 – after that one would start to save more in expectation of retirement in 20 or so years – and after 54 saving would start to tail off as one approaches mid 60s and the retirement phase of one’s life.

The chart below shows the US population by age as at 2014, with my rough generations based on clear differences in the number of people by age. Can you see the problem?


As the Baby Boomers get further into retirement they will need to sell their gold. The problem is that the 15 years worth of Generation X that is just now coming into their peak savings age are a lot smaller. More sellers and less buyers is not a recipe for higher prices. This is something that affects all asset classes, but I do wonder if gold will be one of the first assets to be sold, rather than dividend paying stocks or rental properties.

It is coincidental that just as the early Boomers started moving into retirement age and the late Boomers reached peak saving age that the gold market was weak? The chart would seem to argue that if you are an early Boomer best to sell now while your later Boomers are still in saving mode rather than wait for when Generation X comes along.

If you are a late Boomer then the news isn’t good because it will be about 20 years before the first of the Millennials are reaching peak saving age, which will be when you are between 70 to 75 years old. However, it is questionable as to whether Millennials will be big goldbugs. Consider this interview with generation expert Neil Howe who says that:

“Millennials are much more collective in their orientation and they are much more optimistic about the future. We do a lot of surveys on political attitudes by age and Boomers are by far the most pessimistic of all generations and the most apocalyptical in their values and orientation. Whereas Millennials are much more practical, collectivist and much more optimistic about how things are going to turn out.”

“Today, we talk about our Millennials, China talks about their Little Emperors, you know, the generation which never tasted bitterness, who are incredibly positive about the future and who trust their parents to educate them and wanting to join something big – the China Dream.”

It sounds like gold is going to be a hard sell to Millennials. Is China the saviour? Consider their demographics from Wikipedia below.


Their “boomers” are a bit younger but by only 5 years or so and they have the same Western Generation X population drop off problem.

Now I’m not asserting that demographics are the major driver in the gold market, and there are a lot of other factors to consider, such as different generational behaviour (eg, Generation X starting families later than Baby Boomers, so maybe their peak saving age differs), effects of migration, and whether gold is something people will spend or pass on to later generations (which probably differs by culture as well). But demographics are certainly something investors should consider and something I’ll be looking to research further (and welcoming your helpful suggestions and thoughts).

Jul 302015

So the gold price drops, so the gold forecasts drop. Some recent calls in order of bearishness:

Towards the end of 2010 I started recording forecasts in a spreadsheet, as I noticed many analysts revised their forecasts frequently in response to moves in the gold price. By 2012 I had given up as it was a lot of work to make one point – that in general analysts were just following or projecting the trend.

The chart below shows the forecasts I accumulated from late 2010 to early 2012 (the clustering around July are yearly average forecasts) and I’ve added in the recent ones above.


The first red arrow shows that in general most of the 2012 and 2013 forecasts were just extrapolating the 2011 trend, with varying levels of bullishness. The second red arrow shows that these recent forecasts seem to just be extrapolating the recent downward price trend.

Hard not to be cynical about it, especially since many were not out there loudly making these sub $900 calls before the mid-July gold price breakdown. Even Goldman Sachs, who were prepared to make a big call in mid-2013 for gold to reach $1,050, were about a year early, with their forecast being for 31 Dec 2014.

One of the most reliable forecast surveys has been the LBMA with the chart below showing their performance.


Generally the average yearly price has been within the highest and lowest forecast across the analyst surveyed (except for 2013). For 2015 however, the range is so wide as to be impossible for the price to not get within it, and thus not very helpful.

So far this year the average gold price is close to $1,200, compared to an average forecast of $1,211. If the gold price averages $1,050 for the rest of year the yearly average for 2015 will be $1,140, so it looks like the LBMA’s pool of bullion bank analysts will perform well this year, on a “wisdom of crowds” basis.

I’ll leave you with an upbeat prediction from my spreadsheet for gold to reach $5,000 by the end of 2015 by, surprise, Martin Armstrong (who has been putting the boot into the “gold promoters” recently), made in Dec 2010:


Martin has been negative on gold recently but I guess the $5,000 gold move hinges on his long mentioned 2015.75 Big Bang. If gold does indeed move up from the $1,000s to anywhere near $5,000 in the space of 3 months, that will be best gold call ever made.

Jul 222015

I don’t know if this is the case in other countries, but here in Australia the TV news and other media report the USD gold price, not the AUD price. The result is that often gold will only appear in the local news when the USD price does something interesting or achieves new lows or highs, when for local investors the gold price may not have changed much or moved in an opposite direction.

The reporting of USD prices also means some Australian investors can get confused when they ring up to buy or sell and get quoted an AUD price and say a) “that’s not what it said on TV” or b) “that hasn’t gone up/down much since I last bought it”. While we do mention it to new investors, most forget about the impact of the Australian/US exchange rate on the AUD price of gold. This is best illustrated in the table below which shows an example of a perfect investor who bought the USD low and sold the high.

USD Exchange Rate AUD
24 Oct 2008  $   725.70     0.6528  $1,111.67
6 Sep 2011  $1,913.18     1.0527  $1,817.40
Increase 164% 61% 63%

For the American perfect investor they made a 164% profit but the Australian perfect investor (buying when the USD price bottomed and selling when the USD price topped) only made 63%. The reason is that the exchange rate increased 61% over that time period. You can see the interaction of the USD gold price and the AUD/USD exchange rate in the chart below, with our perfect investor buy and sell points marked 1 and 2 respectively.


If the exchange rate had stayed at 0.6528 the Australian investor would have sold at AUD 2,930.73 (a 164% profit). In this case the appreciating exchange rate cost the investor $1,113.33. Ouch. It is why we tell Australian investors about this rule of thumb: if the exchange rate goes up, the AUD price goes down (assuming a constant USD price) and vice versa.

So when you buy in Australian dollars (or any non-USD currency), you really have to forecast what the USD price is going to do and then what your exchange rate is going to do, and consider the interaction of the two. One way to get a handle on this is to turn the graph above into a scatter graph, which I have done below.


This type of graph doesn’t show time so well (I’ve marked the perfect buy point 1 and sell point 2 for reference), just the relationship between two factors. I have also put in coloured “contour” lines which indicate the points where the AUD gold price is the same across various combinations of USD price and exchange rate.

The really useful thing about this chart is that you can see that the AUD price has a tendency to move diagonally from left to right, following the contour lines. This means that there were periods where the AUD price was trending sideways or showing little change/volatility in its price – in other words, changes in the USD price were counteracted by changes in the exchange rate.

You can also use the chart to see what AUD price you get from various combinations of future USD gold and exchange rate figures. On the chart above it doing this is difficult because it covers such a wide range of different prices and rates. The chart below shows the combination of some more realistic medium term future USD prices and rates.


The white star is about where we are now, USD 1090 and a 0.74 exchange rate, which equals AUD 1473. The arrows represent various potential futures:

  • Green – Australian dollar weakens and gold bottoms and strengthens, in which case AUD gold would be above $1600
  • Blue- Australian dollar weakens and gold continues to fall, in which case AUD gold would be in the high $1400s
  • Yellow – Australian dollar strengthens and gold bottoms and strengthens, in which case AUD gold would be in the high $1400s
  • Red – Australian dollar strengthens and gold continues to fall, in which case AUD gold would be in the mid $1300s

The general consensus on the Australian dollar is that it will continue to weaken due to a poor economic outlook with commodity prices falling. As to the direction of the USD gold price, I think that is hard to call right now as we are in uncharted territory but the sentiment is negative.

What I would note is that there is a reasonable probability that the USD gold price and the exchange rate will continue to move together for the foreseeable future, as both do seem to be affected by the strength of the US dollar. In that case an investment in AUD gold may represent a reasonable bet as it is a case of a falling price (red arrow) scenario versus two neutral (blue and yellow arrow) and one positive (green arrow) scenarios. Of course I will probably be forced to eat my hat now that I’ve made that statement, but hopefully the charts above give Australian investors some help with making their precious metal investment decision.

Jul 082015

“Gold is strong,” I hear you ask, “are you crazy?” Yes, gold fell just below $1150, but in relative terms I think it performed OK over the past 24 hours. The chart below compares gold to some key currencies with the red dot corresponding to 3am US/8am Europe.


Prior to Tuesday gold was following the performance of the currencies listed in the chart. As money ran to the (lets say “perceived”) safety of US dollar you can see the dollar strengthen as indicated by the black line. At the same time the other currencies were sold heavily but note that gold held its ground for a couple of hours, sold off a bit at 6am, held for a few more hours, then crashed just before 9am. It look to me like gold was attracting buying but eventually that was not enough to counter the selling pressure from the professional money (an others) I discussed yesterday.

Having said that, gold did not recover later in the trading day as most of the other currencies did, ending much worse off. However, if we look at the same time period but compare gold to the other precious metals and oil, the picture isn’t as bad (see below).


Again, gold held up while platinum and palladium sold off, and come 9am silver and oil crashed much more than gold. Gold ended this 24 hour period the best performer.

The question here is will gold be able to hold above $1150, or indeed, has it bottomed? With professional market sentiment negative towards gold and Chinese demand weak (more about that tomorrow), there is risk of further downside. If gold can hold, it doesn’t mean it will rally as gold can trend sideways for many years, as it did in the mid 1990s for example (see below).


You often won’t see such predictions made because they are boring, so analysts and commentators usually forecast increases or decreases. While such basing phases can be frustrating, as Justin at Next Big Trade notes,

“each failed attempt disheartens the bulls and continues to plunge more and more investors into giving up which eventually is what causes a super buying opportunity when the real Stage 2 breakout finally materializes. This is why the “bigger the base”, the higher the potential for a big trade because the bulls have been washed out of the investment.”

However, before you go out and load up, consider Steve Sjuggerud’s advice that an ideal investment has to have three characteristics:

1. It’s cheap (value)
2. It’s hated
3. And it’s in an uptrend (momentum)

Gold certainly has the first two covered but we haven’t seen a sustained upward trend yet, which is why Steve is holding off on investing in commodities that he sees exhibiting a similar set up to gold. They say they don’t ring a bell at the bottom, but if gold can hold $1150 then maybe it is time to brush up on your campanology.

May 222015

I keep in touch with the work of academics interested in gold via this website and it is a humbling experience. It reminds me of the saying “those who can’t do, teach; those who can’t teach, blog” (I thought it needed updating).

That website recently posted a September 2014 paper by Dirk Baur, Joscha Beckmann & Robert Czudaj called Gold Price Forecasts in a Dynamic Model Averaging Framework – Have the Determinants Changed Over Time?

No doubt you have seen many commentators writing about their forecasts for the gold price and giving reasons (which is basically their “model” for what drives the gold price). But I bet you have never seen a gold forecasting blog post that include one of these:


That comes from Dirk et al.’s (lets call them Dirk’s team) paper and no, I don’t know what it means, it has something to do with knowing “the conditional distribution of the state at time t−1 given the time t−1 information set Y t−1 = y1, . . . , yt−1”. What I do know is that this hard core approach means what the academics do is rigorous.

I’ve met Dirk a few times when he was at the University of Technology in Sydney, he is now at Kühne Logistics University. Last time I met him he described how he had to present a paper in front of a bunch of other academics, where they do their best to rip it to shreds and/or ask lots of difficult questions. This is standard stuff for academics and it means people avoid circulating rubbish. I don’t think many bloggers would be willing to go through a similar approach.

Anyway, the reason I’ve highlighted Dirk’s team paper is because it proves that the things that drive the gold price change over time and more usefully, what the key ones are and their changing influence on gold. Most of the more serious forecasters usually create a fixed formula based on some variables, see this one by Eddy Elfenbein for an example – which simplifies to:

(((this month’s 2% Deflator/this month’s Ibbotson Real Rate/(last month’s 2% Deflator/last month’s Ibbotson Real Rate)-1)*8+1)*last month’s gold price)

Other models have a lot more variables, such as “commodity prices, interest rates, inflation expectations, exchange rate changes and stock market volatility among others”. What Dirk’s team show is that in addition to working out what weights each of these variables need to have in your formula, you also have to work out how those weightings change over time. This makes sense, because the world isn’t flat and things change. For example, Dirk’s team note that the influence of the stock market on gold is generally higher during times of turbulence.

As you can imagine, trying to work out which variables matter, what weightings they should have and how those weightings should change over time is a pretty tricky exercise and results in a “computational burden” due to “the need of determining a transition matrix Bayesian inference” (I don’t know what that means, which is why I used the word “tricky”). Dirk’s team calculate that a forecasting model with 14 variables results in 16,384 formulas to test, and that is without changing the weightings!

So Dirk’s team used a Dynamic Model Averaging approach which involves some sequential learning in the forecasting procedure. The interesting take aways for me from the paper include:

  • generally only two or three variables are driving gold prices at any one time
  • there are brief periods where you need six or seven variables to model the gold price
  • US CPI played a big role during the 1970s but is insignificant during the “great moderation” between 1980 and mid-2000
  • gold is influenced more by world CPI levels than by US CPI levels
  • silver prices had a strong influence on gold between 1995 and 2005
  • there are significant changes in the mix of variables around the Millennium
  • weak evidence for the importance of stock markets, even during financial crises

At the end of the paper Dirk’s team include charts of the key variables they looked at, which show how useful a variable is in forecasting the gold price (the closer to 1 the more important the variable). Below are four I picked out.


These charts clearly demonstrate the complexity of the gold market – the factors that influence it are dynamic, changing over time. It is like gold is a melting pot of the diverse views of market participants, which probably accounts for why it has a low to zero correlation to most asset classes.

The problem with all models of the gold price is that you have to forecast what the underlying variables will be to get a forecast for the gold price. Dirk, Joscha & Robert’s work shows that you now have to also forecast the importance of each variable, making the task doubly complicated. Something to keep in mind the next time you see a talking head on TV say that gold is going to go up or down because of their view about one single variable they think explains all.