James Turk Blog: The Gold Price and Its Cycle

James Turk Blog: The <b>Gold Price</b> and Its Cycle

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James Turk Blog: The <b>Gold Price</b> and Its Cycle Posted: 29 Dec 2013 06:36 AM PST The Reason they are Attempting to Make Gold and Silver Look Weak "On a day like today when the metals are getting pounded by the cartel, it's important to step back and look at the big picture. And t... Everything is in Place for Another Crisis The locomotive is the market, and in the end markets are always more powerful than government intervention. The locomotive is gaining moment... Scramble For Tangible Assets James Turk of Goldmoney.com predicts, "It's inevitable you are going to see bail-ins as we go forward from here because the cap... Monetary Collapse is a Reality Portfolio management is very much a personal decision. Everybody approaches it in very different ways because everybody's subjective judgeme... James Turk's Outlook for Gold for 2013 until 2015 "GoldMoney Chairman James Turk presents a sequel to his recently released video "Everyone should have a precious metals portfo...

In the Early 1980s the Fed Destroyed the <b>Gold Price</b>, Now the Fed <b>...</b> Posted: 27 Dec 2013 05:50 PM PST Main-stream economists have discovered that rising company profits compared to stagnating wages could a problem for the U.S. economy. For us this implies that the ultimate Fed goal will be to increase wages and inflation, and consequently that the Fed has become the biggest supporter of gold prices. In one of our most popular post we clarified that: Important! Gold and silver prices are an expression of the strength of global non-U.S. GDP growth against the growth and expectations of real interest rates in the United States Going into more detail, the six major fundamental factors that influence gold and silver prices are: Price movements of other commodities in combination with global demand for these commodities, an "indirect pricing" of production costs. Global, and in particular U.S., inflation Trade imbalances and the U.S. debt and twin deficits, that might culminate in a "fear factor". Central bank's activities like money printing or gold purchases and sales. Real interest rates and in particular the ones in the U.S.: interest rates compared to inflation and wages. Private physical demand and supply. Why gold prices have plummeted? The plummeting gold price since 2011, from levels around US$ 1900 to 1200 today, was mostly caused by the following reasons: European austerity and low demand weakened current account surpluses of China and other emerging markets (factor 3 in the list above) Wage increases in emerging markets, in particular in the "BRIIS" (Brazil, Russia, India, Indonesia and South Africa), and to a lower extent in China, were too high. This finally affected their trade balances (factor 3) and the previously high gold demand by their central banks (factor 4). Austerity and tightening in these countries let to a phase of global disinflation that was negative for gold prices (factor 2). Higher oil supply through shale oil additionally slowed commodity-dependent countries among them. Lower growth in emerging markets, restrictions and tariffs on gold purchases (e.g. in India) weakened physical demand for gold (factor 6) and demand for oil and other commodities (factor 1). Thanks to QE3, the U.S. housing market recovered. This reduced the "fear factor" (factor 3). Finally it helped increase investments, job creation in the United States and raised U.S. real interest rates (factor 5). Many of these points were "self-reinforcing" and led to a vicious cycle for gold prices: in 2011/2012 European austerity slowed investments in Europe and later also in emerging markets, but it strengthened investments in the U.S. and the U.S. dollar. Eventually these points helped to pop the gold bubble of 2010/2011 created by Fed's QE2 and some over-investment in emerging markets and under-investment in the United States, but the yellow metal remains in a long-term bull market. In the following we want to examine in more detail factor 5, real interest rates – the difference between U.S. interest rates and inflation. Over the longer term inflation is mostly driven by wages. Gold and silver prices rise with falling U.S. real interest rates, with "financial repression" Still today, American funds are the most important driver of financial markets. Therefore gold and silver prices fall when the investing in U.S. treasuries become relatively more attractive than in gold or silver. In times of high real interest rates, the gold price is weak, and vice verse. click to expand The following graph gives a bit more differentiation. It shows periods when the simple relationship stipulated in this point gets overlaid: by factor (1), the development of commodity prices and global growth – between 2005 and 2007 (despite positive real interest rates) and by item (2), when inflation rose more quickly than rates – between 1977 and 1980 (despite slightly positive real interest rates). click to expand, source The gold price falls when the U.S. economy improves and the chances of a Fed Funds rate hike increase, even if this hike is far in the future. Particularly when more U.S. jobs are created, then gold and silver prices decline. Wages as the underlying factor for interest rates and the gold price During the 1970s, inflation expectations and consequently wages rose in response to oil shocks and rising oil prices. The gold price moved upwards together with wages and oil prices. click to expand, source Paul Krugman Fed chairman Paul Volcker finally hiked interest rates, slowed the economy and increased unemployment with the consequence that unions stopped higher wage demands. New supply (e.g. North-sea oil) suppressed the oil price. Low commodity prices and high rates created a lost decade for Southern America. Global growth was sluggish during the 1980s and the Fed managed to keep inflation under control. Company margins and stock price rose again, the Fed had destroyed the gold price. In 2013, the opposite picture has arrived: U.S. wages have been nearly steady for years, but company margins are still increasing. The wage share of GDP is declining, while companies profit on global supply chains and cheap labor in emerging markets. One mastermind behind the Fed, Paul Krugman, has spoken out in favor of rising wages and more and more economists have recently joined the chorus. The point is that we have a depressed economy for workers, but not at all for corporations After having achieved considerable improvements in the unemployment rate, they want more from the Fed. The Fed typically implements the ideas of economists like Krugman, hence be sure that the Fed will continue the stimulus. We judge that the central bank will continue to support the U.S. and the global economy as long as inflation is low, no matter how low the unemployment rate sinks. The main Fed gauge, the GDP deflator for personal consumption (PCE) currently stands at 1.4% and is far under the target value of the Fed's Evans rule of 2.5%. In our post why the euro should reach 1.50 in the next years, we explained why the way to higher U.S. wages in global competition is very long. Therefore it is clear for us that Bill Gross is right with his "Reverse Volcker Moment": the Fed will keep on rates low until finally inflation moves to 2.5%. At this inflation level, however, stock markets typically depreciate and gold prices rise. It is hence clear for us that: The point is that we have a depressed economy for workers, but not at all for corporations Important! the Fed should continue to support rising inflation, suppress real rates and consequently support gold prices for many years. Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and we encourage you to complete your own due diligence when making an investment decision. Even if we often write about Forex trading, our advices aren't written for day traders who follow technical channels, but rather for mid- and long-term investors. Our aim is to show discrepancies between fundamental data and current asset valuations, which can lead in mid-term to an inversion to technical channels. ----------------------------------------------------------------------------------------------------------------------------

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