Whither Gold?

Damned if I know. I am not a particular “goldbug”. I have a little exposure via investments in producers, Orezone (ORE.T) and Newlox (LUX.C) (producing in a very small way), development stories, Marathon (MOZ.T) and a bunch of very speculative explorers. So I am interested in the price of gold and in how gold shares in general are performing.

I am also working with a very old friend and a world-class data guy on a project which, I hope, will create useful, daily bulletins about a bunch of different metals designed to be a very quick read for metals and mining-focused investors. Of course, we’re starting with gold. [When this project is in beta I hope to post it here as a bonus for my soon-to-launch pay side. But it will appear on this side of the paywall on a weekly basis.]

Here’s the thing, effectively we have access to any data we want to include. A great gift on the one hand, too much of a good thing on the other. When you start looking there are literally hundreds of datasets devoted to gold, gold futures, gold shares not to mention world gold output, central bank buying, India jewellery sales and the gold price in different currencies. And that is just the first scan. Then there are individual gold companies, gold indexes, options on gold indexes and so on.

You can, and I have, spend days simply finding new data sets. All of them tell a story, some of them might give a sense of the direction of the gold market. But my old friend has a rather better take. “What we are trying to spot is the next gold bull run.”

The price of gold was fixed until 1970 so the actual bull runs go from that date. Here are the raw numbers for the price of gold on a log scale (taken from Macrotrends.com):

And here are the inflation-adjusted numbers on a log scale:

So, are we at the beginning of the next bull run or are we in a period of consolidation and range-bound trading? And what might tell us?

My pal David Erfle writes a weekly commentary over at Kitco as well as publishing his subscription newsletter, www.juniorminerjunky.com. His commentary is well worth reading but, and the charts above will tell you why, what is vital to know about David is he started investing in gold and silver juniors in 2001. He literally rode the 2000-2011 gold bull all the way up. David writes about the “macro” conditions which affect the price of gold. David is looking hard for the next bull run.

He is indirectly responsible for the last two variables in my provisional “Wither Gold?” data array. Here is the first set of variables we are likely to be using:

1. Current spot price of gold USD

2. Current spot price of gold (Shanghai)

3. Current price of 1 ounce gold maple leaf

4. Senior Gold Miners Index/ETF

5. Junior Gold Miners Index/ETF

6. Gold Futures 3 month

7. Gold/Silver Ratio

8. Current price of Copper

9. 10-year Treasury Yield – US Fed

10. US Dollar Index DXY

The current spot price is pretty obvious. But the second variable, the current spot price in Shanghai is a bit more subtle. The fact is that the current spot price is effectively a “paper” price, gold for future delivery which does not have to be physically in any one place or which, frankly, may not actually exist at all. In Shanghai, while gold may be sold for future delivery, it actually has to be in an authorized vault. Which reflects the real price? Better have both.

The third variable, the price of a one-ounce Maple Leaf coin tells us what the ordinary man on the street will be paying for a well-known gold coin. Guess what, it is not the spot price. My own coin dealer, Victoria Old and Gold, is charging a CDN $90.23 per ounce premium for in-stock, random year, Maples. Another piece of data.

The next two variables, the Senior and Junior Miners Index ETFs are just that: ETFs which track baskets of Senior and Junior Gold Producers. Here is the Van Eck Senior Gold Miners ETF. You can see it tracked the 2011 bull rather well.

Here’s the Van Eck Junior Gold Miners ETF which only started in 2010:

We are still debating over whether to use 3 month forward gold futures or six month forward. Both are indicators of gold market “sentiment”. The question being, which is the better indicator of the likely trajectory of the gold price or, more specifically, of the prices of gold shares? Right now, I really cannot say. There’s a reason this is a prototype.

The next variable, the gold/silver ratio is just that: the price of gold versus the price of silver expressed as a ratio. There is no “right” ratio. Anomalies can indicate that silver is oversold or gold is over-bought.

The current price of Dr. Copper may seem like an odd number to put into an array about gold but copper tends to indicate the overall state of the economy. My own sense it that it may be a leading indicator of the beginning of a gold bull run. Again, I need to do more work and copper may not make the cut.

The last two variables are important in that gold is commonly priced in USD and if the dollar strengthens gold tends to drift lower. And the 10-year Treasury Yield is the measure of the return on an essentially risk-free instrument. It is unlikely a gold bull run will get moving if people can park their money at 5% risk-free.

As I said, the gold array is very much a work in progress. I would very much appreciate any feedback my subscribers have on the overall concept or any of the variables being contemplated.

[Disclaimer: I own ORE, MOZ and LUX. I may buy or sell at any time. I don’t own any physical gold or gold ETFs.

This is not investment advice. I am down a lot in the overall market. Do your own due diligence.]