Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19
Crude Oil Price Fails At Critical Fibonacci Level - 15th May 19
Strong Stock Market Rally Expected - 15th May 19
US China Trade Impasse Threatens US Lithium, Rare Earth Imports - 15th May 19
Gold Mind Reader's Guide to the Global Markets Galaxy: 'Surreal' - 15th May 19
Trade Wars and Other Black Swan Threats to Your Investments - 15th May 19
Our Long-Anticipated Gold Momentum Rally Begins - 15th May 19
Defense Spending Is Recession Proof - Defense Dividend Stocks - 15th May 19
US China Trade Issues Will Drive Market Trends – PART II - 14th May 19
The Exter Inverted Pyramid of Global Liquidity Credit risk, Liquidity and Gold - 14th May 19
Can You Afford To Ignore These Two Flawless Gold Slide Indicators? - 14th May 19
As cryptocurrency wallets become more popular, will cryptocurrencies replace traditional payments? - 14th May 19
How US Debt Will Reach $40 Trillion by 2025 - 14th May 19
Dangers Beyond a Trade War with China - 14th May 19
eBook - Greatest Tool for Trading? - 14th May 19
Classic Pitfalls for Inexperienced Traders - 14th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Gold Price Plunge - Where's the Opportunity?

Commodities / Gold and Silver 2013 Apr 17, 2013 - 03:50 PM GMT

By: Rory_Gillen

Commodities

Never a dull day in markets! With Japan entering the central bank quantitative easing game, currency devaluation as a global theme is accelerating, yet the gold price has just succumbed to the most serious correction since the gold bull market started in 2001.


As I write, the gold price has fallen 10% in the past two days, and has now declined decisively through key support levels in the $1,525-1,550 area that had held good for the past 16 months. The gold price is now down 25% from the peak. The gold bulls have been mauled. Yet, it can't be too surprising. Gold offers no income, and it appears that the reasons for buying have become less clear cut of late. The key US economy is improving, equities (overall) are doing well and inflation, as a threat, is nowhere in sight.

Over the centuries, gold has protected investors against inflation. But that is all gold does. It is not a productive asset, and over the long-haul has never matched the returns from real businesses (equities), and most likely never will.

As I outlined previously, for some time now the difficulty with an unqualified bullish gold argument has been that the gold price has already priced in a substantial uptick in inflation, accordingly to my calculations at least. The enclosed chart highlights two gold prices. The first (solid) line highlights the actual gold price from $35 dollars an ounce in 1935 to the current price of $1,410 an ounce. The second (broken) line highlights what the gold price would have been, and would now be, had the gold price simply risen in price to match recorded inflation. The chart has been suggesting for some time that the gold price is ahead of itself.



At the top of the last great gold bull market in January 1980, the gold price had over-shot the likely rise in inflation, and spent 20 years correcting. From 2001 to the current date, the price of gold has risen from a low of $255 an ounce to $1,410 an ounce, which has not only made up for the initial undervaluation, but additionally has priced in investors expectations of a substantial rise in inflation.

The trouble, of course, is that there is no sign of an out-of-control inflationary spiral, not yet anyhow. With all the quantitative easing, it is natural to conclude that inflation is the inevitable outcome. I buy that argument, too. The tricky point is timing. Perhaps the slowdown in emerging markets, falling commodity prices and now a falling gold price are signaling that deflationary forces are, once again, gaining the upper hand. In that context, a correction in the gold bull market seems entirely logical to me.

In markets, of course, the baby often gets thrown out with the bath water. While those holding gold from higher levels might be nursing some losses, spare a thought for the gold miners. Collectively, this subsector of the global equity market is down well over 50% from August 2011 levels. The world's largest gold producer, Barrick Gold, is back to 2005 share price levels, currently trades at its balance sheet value and on just 6 times expected 2013 earnings, and offers a dividend yield of 3.3% (covered by earnings 5 times). Bears of the gold miners say that their earnings have not been benefiting from the strength of the gold price. Perhaps the bears lenses are not long enough. From 2003 to 2012, Barrick Gold increased its earnings from $0.32 to $3.73 a share for an 11-fold increase (source: Valueline).

My own view is that inflation will appear in spades, in time, in one form or another. Currency devaluation lowers the value of your assets abroad; the inverse of inflation if you like. Gold, in my view, is a great protector against the inevitable devaluation of currencies which are currently burdened by too much debt in the global economy. Whether you see it or not, the consequences of currency devaluation are that your local currency assets are worth less, just the same as if inflation was rampant.

But gold is not the only protector. In fact, the speed and severity of the decline in gold mining share prices has probably just given us the tell-tale buy signal of capitulation in markets - the scary cascading decline in prices, as everyone heads for the exit at the same time. If good fundamental values are on offer at the end of the selling frenzy then the buy signal becomes compelling.

In other words, the gold price could be a side-show, and if it even stabilises around current levels, on a 2-3 year view, the outsized returns from here are more likely to be delivered by the gold miners.

Rory Gillen

GillenMarkets.com

Rory is the founder of GillenMarkets.com and the author of 3 Steps to Investment Success along with being a regular contributor to the media on issues affecting the financial services industry. He is a qualified Chartered Accountant, a former senior fund manager with Eagle Star, Ireland (now Zurich Ire.) and a co-founder of Merrion Capital in 2000 where he was Head of Equity Research among other roles for several years. In all, he has spent over twenty five years working in the financial services industry. He founded GillenMarkets in 2005 as a stock market training company and obtained approval from the Central Bank of Ireland to provide investment advice in 2009. He is married with three children and lives in Greystones, Co. Wicklow, Ireland

© 2013 Copyright GillenMarkets - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules