Tempted to buy gold? Better to be patient!

goldbarsOn January 8th, I published Why the price of gold skyrocketed and why it’s over! I’m beginning to see (finally) some acknowledgement that the price of gold inflated by the fear that a collapse in the global financial infrastructure was imminent, is rapidly losing its lustre.

The price of gold has fallen 20% from its peak, and on CNBC the talking heads are asking: ‘Is it time again to buy gold?’

Gold April-13Because the price of gold is more volatile than a manic-depressive without meds, it’d difficult to determine how low (or high) it can go. Why am I sure it can go much lower? I was at Arizona Bike Week and saw some jewellery (biker stuff…skulls and such). I noticed that a sterling silver ring was selling for $300, but a solid gold one was nearly $5000. Now if I wouldn’t even consider buying the gold ring after several JD shots and beers (and the Doobie Brothers performing a few feet away) then it’s obvious that the gold/silver ratio is out of whack.

gold-silver-ratio-1882As I type this, gold is $1424/oz. and silver is $23/oz. Therefore the ratio of gold to silver is >60. I find that 40 to 1 has got to be coming (no real reason, why not?) suggesting a target price for gold of $920/oz.

But wait. If silver is in such abundance, and the global financial system stabilizing with each passing day, should we not assume a more modest silver price will prevail in due course?

Silver Price Chart April-13If the environment we’re evolving into resembles the 90’s at all, then $5/oz. silver doesn’t seem outrageous which would (at 40 ratio) mean a gold price of $200. Crazy? It’s happened in my lifetime. However, let’s say $15/oz. silver – industrial demand should pick up – which puts gold at $600/oz.

Will bullion escape this perilous situation? Will gold bugs be as fortunate as James Bond in the following clip from Goldfinger?

About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He recently authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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15 Responses to Tempted to buy gold? Better to be patient!

  1. Nancy says:

    Interesting Mal! As noted on the recent CBC documentary re: Gold with Eric Sprott interviewed – ? is, is there real physical gold trading, such as bullion or is it all just speculative “paper” – will the real physical amount of gold play into the real price of gold – we hear “there ain’t any more gold”.
    Who is truly manipulating the price, and who is really profiting – the traders VS those wishing to hold gold as a “safe” hedge? Appreciate your comments & your M I rally site thank you N

    • Mal Spooner says:

      The paper (derivatives, ETF’s etc.) create an immense amount of leverage…much like mortgage backed securities a wholesale ‘run-for-the-hills’ will mean gold investors will be trying to sell bullion they don’t really (physically) have….would get very ugly.

  2. AcuoInvestor says:

    I don’t see this happening for what it’s worth, but it’s an interesting read. Betting that gold will decline relative to the USD is a bet that fiat currencies will appreciate. There’s a world-wide currency war going on, a blitz to create inflation, quantitative easing, an anti-austerity movement, a lingering global de/recession, and European and American debt levels at unsustainable levels. Betting on paper-denominated currencies is a losing proposition – better to be in productive assets (stocks) or hard currencies like gold. Time will tell…

  3. Amendola, Marc says:

    Dear Mal,

    You are wrong. The global financial system and the whole planet is going into a major depression.

    Silver will be at 40$ and gold at 2000$ within 18 months.

    Marc

    Marc Amendola, CPA, CA Conseiller principal en gestion de patrimoine Administrateur associé, Gestion de patrimoine PARTENAIRES À VIE

    Senior Wealth Advisor Associate Director, Wealth Management BUILDING RELATIONSHIPS FOR LIFE

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    • Mal Spooner says:

      Let’s say judging by the price behaviour of late, that i am already right. Longer term you might be right. Thanks for sharing your thoughts.

      • AcuoInvestor says:

        You are picking beginning and end points to suit your purposes. Let’s take a look over the last decade – where was gold 10 years ago (in USD terms)? Where was it 15 years ago? Where was it five years ago. There’s a difference between maverick investing and maverick trading. Taking a short blip downward on a generational advance up is a bit… tricky…

  4. lucentio says:

    Mal The fact that you are so negative, buying into the popular thinking, says that we are close to bottom.

    • Mal Spooner says:

      LOL Stephen. Does the fact you are still postive (like so many others) means there is more downside? Nobody was negative three months ago when I was negative….And i will turn positive when everyone is really negative.

  5. D says:

    This was a stop run so the big boys can get on board for the last hurrah, no more no less. Bull markets don’t end like this. And, with respect, being “right” on gold over 5 months isn’t much use. It’s not a stock, judged on a quarterly basis, but real money protecting against the long term ravages of fiat inflation.

    • Mal Spooner says:

      Thanks for you insight. But i believe being right is everything…over 5 months, 5 days, 5 years or 50 years….it’s impossible to be right (or remain solvent) over the long term if you’re wrong over every short term.

  6. tok2gman says:

    Not sure how well your $600/oz target fits with producers cost per oz. We are still in a demand and supply driven economy, are we not? Would not production of gold simply come to a halt, should the price drop below producers’ cost? If that happens, the price of that cool ring, which you mentioned, may just skyrocket.

    With regards to a long term or a long run, it feels like a marketing term for a sales pitch these days, more than anything else.

    • Mal Spooner says:

      Too much supply will cause major restructuring for producers. It took nearly 30 years for the gold prive to get back up to $850 – the peak in 1980.

      The target of $600 is tongue-in-cheek. What may happen is:
      – we see costs decline to a number that truly represents the cost of producing an ounce (yes, low-grade production will be shutdown as big producers like Barrick are beginning to do).
      – excess supply is gradually bought up (at lower prices) until there is demand for new supply.

  7. tok2gman says:

    Interesting. Do we have too much supply? I read that mints run out of products. If this would be the case, how long would such cycle take to complete? 10-15 years? What about the statements that high grade deposits are no longer available at a reasonable economies of scale? Also, Malvin, my calculator tells me that $850 discounted at 5% over 33 years produces present value of near $4,250. Clearly, this is just a mathematical extrapolation, but nevertheless, even half of this value is a significant increase from the current levels. My point is, it does not feel like gold is overpriced considering long-term inflation rate, devaluation of currencies, escalation of the costs of inputs etc. I am not saying that scenario which you have described is unrealistic. I do feel that many things would have to change, and not just in gold mining, in order for it to take place.
    Looking forward to your reply.

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