New Analysis Suggests a Parabolic Rise in Price of Gold to $4,380/ozt. (+5K Views)

 According to my 2000 calculations, if interest rates and inflation stay constant over the next 2 years, we could expect to see (with 95.2% certainty) a parabolic peak price for gold of $4,380 per troy ounce by then! Let me explain what assumptions I made and the methods I undertook to arrive at that number and you can decide just how realistic it is. Words: 740

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has further edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

 

The chart above shows the gold price (left hand scale, red line) since 1968, when the Gold Pool broke down…[and] the price of gold was no longer fixed…

• From February 1968 to February 1980 gold rose almost 25-fold, from $35.50 per ounce to as high as $875 per [troy]ounce.
• Gold then started a multi-decade long decline towards $250 per ounce at the beginning of the 21^st century. In the same time period, CPI doubled from 78 to 175.60.
• From then on, gold rose substantially, from about $250 to $1,920 earlier this year (x7.68), while the CPI rose from 175.60 to 226.42 (only 29%).

[Because there does not  seem to be] a strong correlation between the gold price and the general price level [in the above observations] I thus figured there had to be other forces at play that influence the price movement of Gold, and yes, I think there are…Eddy Elfenbein wrote an article, The Future Price of Gold and the 2% Factor, [see article #8 below and another on the subject – see #9 below]  that really intrigued me. (Special thanks also goes to Jake from EconompicData, who also wrote about this topic, and who has helped me a lot with solving formulas.) Elfenbein had found a “model” to explain the movements in the Gold price. He said:

1. gold isn’t tied to inflation, it is tied to low real rates which are often the by-product of inflation.
2. when real rates are low, the price of gold can rise very, very rapidly.
3. when real rates are high, gold can fall very, very quickly.

[The above are] interesting observations [especially in light of the fact that] Ben Bernanke [has] promised to keep rates at record low levels throughout 2013 in order to stimulate the economy.[As such, according to Elfenbein’s model,] when nominal rates are near zero, every bit of inflation we get will lead to negative real yields, causing the gold price to rise substantially over the next two years…

I wanted to see it myself, [and thought I might be able to] improve the “model” and I think I managed to do so, as my model “gold price” has a higher correlation with the gold price. With a lot of formulas in excel, I calculated the real short-term rates, level of inflation, and “calculated” a model price for gold, based on the models of Jake and Eddy…It took about 1 hour to calculate every combination of 100 leverage factors and 20 deflator factors. I found out that a deflator of 2.15% and 2.20% gave the best results, with a leverage between 5.7 and 6.95, instead of the 2% deflator and 8x leverage as Jake and Eddy found out. Based on these combinations, I was able to reproduce a “model” price for gold – and the results were rather impressive to say the least. The model price of gold based on a deflator of 2.15% and a leverage factor of 6.90 had a 95.52% correlation with the actual gold price [as the chart below outlines]:

For those who prefer to look at logarithmic charts below is such a chart:

 

Now, what does this all mean? Does the model have the potential to “forecast” the gold price? Maybe. It depends on the nominal short-term rates, and the level of inflation. The first one is pretty easy to “guesstimate”, as Bernanke promised to keep rates near zero for the next 2 years. The average annual (officially reported) rate of inflation over the last 43 years, has been 4.44%.

If we assume we would see a similar rate of inflation over the next 2 years, the Gold model “forecasts” a gold price of $4,380 (as can be seen in the chart below]:

To put things in perspective, please have a look at the logarithmic chart if you think the chart above looks “bubbly”.

From the beginning of this bull market, it would “only” be a 17.5-fold increase, compared to the 25-fold increase from 1968 to 1980. A similar 25-fold increase would lead to a gold price of about $6,250.

We now have another reason to believe legendary gold experts Alf Field [see articles #2 & #3 below] and 114 other analysts  [see article #6 below] who are fully confident of a parabolic rise in the price of gold with targets of $4,000 and above. [Also read here (#7 below) a previous article I wrote on the future price of gold.]

*http://profitimes.com/free-articles/gold-model-forecasts-4380-gold-price/

Related Articles:

 1. Gold: Will it Go to $12,500 – $24,000 – or $39,000/ozt. – by End of Decade? Here’s the Rationale for Each

4. Where are We Now in the Bull Market in Gold – and How Many Years/Months are Left?