What Comes Up Must Come Down: Gold Falling Fast

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Precious Metals, Supply & Demand

A friend of mine recently decided to “get out of the market” and took his cash to buy gold. My next question, “what price did you pay?” His answer, “$872/oz”. One word for that decision, “ouch!”

Gold has long been a “safe haven” the currency of choice if you will when the world around us seems to crumble. But gold has been falling rapidly. In fact, October was gold’s worst performing month since February 1983, according to this article. Not that anyone should listen to our commentary on this metal but gold futures have been declining for some time as we have previously reported and forecasted.

So when does it make sense to buy gold, hold it or sell it?

As we develop our own metals forecasting tools, we constantly evaluate what is going on with several variables which impact metals pricing. These variables include the following: actual and expected demand, actual supply (this includes supply disruptions), currency trends (e.g. is the dollar going up or down relative to other major currencies), global interest rates, the degree and amount of speculation in the particular market, raw material input costs (in the case of steel), energy costs, costs to extract metals and a plethora of smaller factors which impact the price of metals such as transportation, alloying elements etc. We also like to look at the historical price of a particular metal. Our contention is that many of the investment banks and research firms weight the historical price fairly significantly in their price predictions though many have abandoned that practice in recent years (citing the BRIC super-cycle of growth). But we won’t get into that analysis here. The point is, how does one look at gold?

In short, gold is much less affected by supply and demand than other metals because it is not really “consumed.” In fact, we reported on this earlier this year, that only about 12% of the world’s gold production is used in industrial or commercial applications. So we go back to our other criteria and conclude that the price of gold will be mostly dependent on where global interest rates are, where the dollar is and where speculators are hedging their bets. If the historical price of gold is somewhere in the $300-400 range, then what might we conclude?

We have a mixed bag. Clearly, Friday’s closing spot price of $724/oz is historically, very high. And, the Fed recently lowered interest rates. Most believe interest rates in the UK and Europe are also poised to drop to spur demand. This could create a bit of instability in terms of the dollar/Euro and dollar/GBP exchange rates. But since the Fed doesn’t have much more to go in lowering rates here and Europe does, I’m going to call for the dollar to hold steady or slightly increase against these other currencies. That may put some pressure on gold, despite lower interest rates for the next few months at least.

Personally, I can’t see how it makes sense to buy gold now. Holding may also be a scary proposition. It would have been better to sell at the $1000/oz level or do what this guy did and sell of his showroom. No, like Warren Buffett, I’m going to stick with equities, which by way of conventional wisdom, the longer you hold em, the better you’ll do.

–Lisa Reisman

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