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Gold’s Outlook for 2014: Better than Wall Street Expects
Gold is still a tourist in the canyons of New York City. While respected worldwide, and in most of the heartland of America, gold made its tentative debut on Broadway in the form of gold exchange-traded funds (ETFs) in 2004. For the next seven years, gold was one of the biggest hits on Broadway, as traders piled into the ever-rising metal via easily-traded paper shares, rather than those cumbersome coins and bars that you have to carry, store and insure. From 2004 to 2012, the pundits on Wall Street predicted higher and higher prices for gold – and they looked like geniuses until gold’s collapse in April of 2013.
Now, some of these same geniuses are dumping gold and predicting ever-lower gold prices for 2014 and beyond. Here are just a few examples: Goldman Sachs sees a “significant” (15%) decline in gold for 2014. J.P. Morgan just reduced its 2014 forecast by 10%, from $1400 down to $1263. Morgan Stanley sees an average $1313 in 2014. Scott Nations, president and chief investment officer at NationsShares, sees gold’s true value in 2014 at closer to $1,000 per ounce. Expressing Wall Street’s new-found bias against gold more candidly than most analysts, Nations told CNBC on December 23 that he “wouldn’t buy gold with my worst enemy’s money.” Why? Because “I think it should go below $1,000 in 2014.”
Some of these institutional experts sound like ministers at a funeral – or the children of a painful divorce: Quincy Krosby, a market strategist at Prudential Financial, said “Investors were heartbroken by gold…. The selloff was one of the deepest purges in an asset class that I’ve seen. They went into gold because they saw the momentum continuing. Until it stopped. And it stopped violently.” From the mining community’s perspective, $1200 gold is a disaster. Mark Bristow, CEO of Randgold Resources, a gold mining company, says, “There is a lot of pain ahead…A lot of miners are going to have to deal with the market very differently. There is too much unprofitable production,” resulting in some closed mines.
Some European analysts tend to respect gold more than their New York-based brethren. Germany’s Commerzbank sees gold reaching $1400 by the end of 2014. Commerzbank predicts that bonds and stocks will not be as attractive as gold, so “speculative financial investors” will favor gold once again. After gold bottoms out in early 2014, they predict, the “gold ETFs should report inflows again from the second quarter, supporting the price recovery.” UBS (Union Bank of Switzerland) is more neutral. They reduced their 2014 target to $1200, down from a previous forecast of $1325. UBS also said we could see gold touch $1050 before rising. UBS also cut its 2014 forecast for silver to $20.50, down from $25.
While gold and silver have begun 2014 with a surge – reaching $1250 and $20.50, respectively, in the first three trading days of the year – there will continue to be the inevitable corrections along the way. However, the longer gold stays mired in the $1200 range (or a wider range of, say, $1000 to $1400), the more time investors will have to accumulate a meaningful position in the yellow metal, as a reasonable and modest (5% to 10%) portfolio position, like a cash or currency alternative of proven historic merit.
Why Gold’s Current “Pause that Refreshes” Could be like Gold’s 1974-76 Doldrums
Many pundits are calling gold’s 650% rise from $255 in 2001 to $1923 in 2011 a “bubble,” like the 1970s 24-fold rise from $35 per ounce (gold’s pre-1971 fixed price) to $850 per ounce in January of 1980. That analysis would imply that gold will move sideways to down for the next 20 years, as it did from 1980 to 2000. But there is another way of looking at the 1970s, which implies much higher gold prices ahead.
First, let’s put the phony $35 fixed gold price in context. In 1934, President Franklin D. Roosevelt forbid Americans to own gold bullion, valued then at $20.67 per ounce. By fiat, he then revalued gold up 69%, to $35 – the official gold price until August 15, 1971, when President Richard Nixon “closed the gold window,” (i.e., he refused to honor the full faith and credit of the U.S. Treasury to redeem paper dollars with gold). Gold then began to rise, even though Americans were forbidden to own gold until late 1974.
Gold prohibition deserves a brief comment. Americans had their gold taken from them, by force of law, for $20.67 an ounce in 1934, and they were forbidden under statutory penalties of up to 10 years in jail for owning that inert element, until the last day of 1974, when Americans were legally allowed to own gold again. By then, gold’s price had risen 10-fold in 40 years – from $20 to $200. Americans were forbidden to own gold during its greatest growth phase. This strange but true story happened in the land of the free!
In the early 1970s, between Nixon’s move to set the dollar free from gold (1971) and Ford’s decision to allow Americans to own gold (1974), gold’s biggest surge came from October, 1973 – after the OPEC oil embargo – to December, 1974, a time of inflation, recession and political upheaval in America. Gold doubled from $95 to $190 in those 14 months, but once gold became legal for Americans to own at the end of 1974, it suffered a long bear market decline to $105 in September, 1976 – similar to the recent gold decline (since 2011). In fact, if you merely add a decimal point, the decline from $190 to $105 (1974-76) is like a drop from $1900 to $1050 now. So, even if gold dips to $1050 in the current correction, a bull market like the late 1970s is still possible. Here are some interesting parallels, using “average” prices:
From 1971 to 1975, gold quadrupled, from an average $40.80 in 1971 to an average $161 in 1975. If you just change the decimal points one place to the right, you see an almost mirror image in 2004 to 2012. In the aggregate, gold gained 295% (1971 to 1975), which is very similar to its 307% gain, 2004 to 2012.
In each case, gold’s price gain is almost exactly 10-fold – one decimal point, give or take a small percent. For instance 2009′s average $972.35 is almost precisely 10 times 1973′s average $97.32 gold price. But the point is: Gold’s bull market was not over in 1975 – and it may not have ended in 2012 or 2013, either.
Gold’s Sharpest, Strongest, Shortest Surge was +340% in 14 Months -
From $193 on November 30, 1978 to $850 on January 21, 1980
During the administration of Democratic President Jimmy Carter (1977-1980), gold moved up gradually at first. But in the 14 months from the end of November, 1978, to January of 1980, gold gained 340% in 14 months. In 1979, gold’s move was still quite gradual in the first half of the year, gaining momentum in the second half of 1979. Then, gold’s biggest move came in less than two months, rising from $393 on November 27, 1979 to $850 on January 21, 1980 – up 116% in just eight weeks, a spiky “bubble” peak.
The main engine for gold’s final spurt was the Soviet Union’s invasion of Afghanistan on December 27, 1979. Going into the Christmas break, gold closed at $473. Then it opened at $512 on December 28, the day after the Soviet coup. Then, gold crossed $600 on January 7 and $750 on January 16 before peaking at $850 on January 21. That price was a spike, not a sustainable peak. In fact, gold traded over $700 for only six trading days between January 16 and 24, 1980, before falling below $500 by the end of March.
The Soviet invasion of Afghanistan was merely the “last straw” for gold. President Carter seemed to be helpless at home and weak overseas. His July (1979) “malaise” speech reflected his inability to solve the twin demons of inflation (14% in 1979-80) and a deep recession. The Prime Interest Rate was 15.25% at the start of 1980. There was also a second, more severe energy crisis (the first was in 1973-74), in which we suffered long gas lines when Carter’s Department of Energy bungled the distribution of oil and gas. The annual average price of oil tripled during Carter’s years, from $13 per barrel in 1976 to $38 in 1980. The dollar was also very weak, falling 70% to the Swiss franc and German mark from 1971 to late 1978.
So, 1979-80 comprised gold’s perfect storm, since it involved inflation, a weak dollar, weak American foreign policy, high unemployment and a deep recession, making gold preferable to stocks or bonds.
Could 2014-2018 be Similar to 1976-1980?
While most pundits have pointed to the 2011 “bubble” peak as a replay of the 1980 spike to $850, a more realistic comparison is the long bull market of 1965 to 1975 being similar to the gains from 2001 to 2011. This means we have yet to see gold’s major move, similar to the sharp, meteoric rise from 1979 to 1980.
The rise in gold and silver prices began on the global market in 1965, when inflation began to rise. In the U.S., President Johnson took silver out of American coins in June of 1965, six years before Nixon closed the gold window. The devaluation of the British pound in 1968 was a preview of the dollar devaluations of the early 1970s. Gold began rising in the late 1960s, even though America’s fixed price remained at $35. According to Kitco.com, the average global gold price was $38.69 in 1968, rising to $41.09 in 1969.
If we want to compare today’s gold market to 1976 instead of 1980, we could some tremendous price surges soon. Here are some potential future gold gains, projecting the late 1970s over the next five years:
Of course, there is no promise that these gains will come within five years. It could take longer. We may have to wait for the “perfect storm” conditions of the late 1970s to return – a weak president unable to stop global revolutions from threatening American safety, high and rising inflation, recession and high unemployment, a weak dollar and the possibility of renewed energy shortages and high interest rates.
What if Wall Street is right and gold stays down below $1300 for all of 2014, averaging a mere $1250? That would be very disappointing to gold investors, and it would give Wall Street a chance to crow about the virtues of stocks or bonds over the “barbarous relic” of gold, but it would fit right in with the 10-fold projection from the average historical price of 1976, before gold made its major move in the late 1970s.
Furthermore, what if gold’s average price rose to just $1477 in 2015? That would also be discouraging, in light of gold’s peak above $1920 in September, 2011. But if the next few years are anything like the late 1970s, we could see gold reach $2000 in 2016, a major election year, and then $3,000 or even $6,000 if the conditions of the late 1970s return. Of course, it is very difficult to predict these dismal conditions in advance, but few pundits in 1976 saw the return of high inflation, a second energy crisis, foreign policy failures, Iranian hostage-taking, a 21.5% Prime Rate and a severe double-dip recession ahead in 1979-82.
Gold’s Fundamentals Argue for a Continuing Modest Rise
While it would delight gold bugs to see $6,000 gold within five years, most other investors would be far better off seeing a gradual gold rise. A world in which gold soars implies a world falling apart and nobody wants to see that. Global unrest, combined with deflation or high inflation, is bad for stocks, which still comprise the lion’s share of a balanced portfolio, so a gradual rise in gold would serve investors better.
The main fundamentals supporting gold’s price, which we have elucidated in far more detail in the Gold Wisdom Guide, include: (1) Continuing strong physical demand from China, which is now the #1 gold producer and #1 gold consumer; (2) A return to sanity by the Indian government, which has crippled their domestic gold market with high tariffs and taxes on gold imports; (3) rising physical demand for gold bars and coins in the Middle East, Europe and America; and (4) a return to a more balanced approach to paper gold (ETFs and futures) on Wall Street – i.e., a return to moderate accumulation of gold, not blind selling. In addition, (5) the Federal Reserve should continue quantitative easing under Janet Yellen’s leadership, and (6) many “emerging market” central banks continue to accumulate gold. Here are a few examples:
- Turkey bought 143.6 tons of gold (4,616,847 ounces) in the first 11 months of 2013, up 22.5% from the same 11 months in 2012.
- Russia bought 57.37 tons, bringing its gold reserves up to over 1,015 tons, now the eighth largest gold holding in the world.
- Kazakhstan bought gold in each of the first 10 months of 2013, increasing its total gold holdings by 21% through October.
- Azerbaijan started the year with no gold but now owns 16 tons.
- South Korea increased its central bank holdings by 23.7% in 2013, and China has likely bought more central bank gold than any other nation, but they seldom disclose their total holdings.
On the supply side, we’ll see more gold mines closing, as they cannot make a profit on $1200 gold. This limits the new supply. In addition, many mining CEOs are talking about returning to their old practice of selling their production forward, under the assumption that gold prices will continue to retreat further. This takes new supplies off the market early, potentially creating a warehouse supply shortage later on.
We have no idea where gold will finish 2014, or 2018, but we are hoping to see a relatively long, flat trading range, so that we can accumulate a gold position for the next surge, which will surely come.