Wednesday , 11 December 2019

My Model Suggests A Fair Value For Gold Is $2,500 to $4,500 In 5 Years

…What should prices be for gold in 5 years given our debt-based QE manipulated economy – $2,500/ozt, $4,500/ozt. or perhaps even spike as high as $10,000/ozt?. Check out my model. Its correlation since 1971 is 0.97 with an R-Squared value of 0.95.

This post is taken from the original article by Gary Christenson and has been edited ([ ]) and abridged (…) for the sake of clarity and brevity.

Consider the following graph of:

  • actual gold prices (each annual data point is the average of about 250 daily prices) and
  • calculated gold prices based on an updated empirical model.

A close up of a map Description automatically generated

What the above graph does NOT do:

  • It is an empirical model, NOT a mathematical proof. It guarantees nothing. While the model has worked for five decades, it could become less effective tomorrow, next year, or never.
  • The model does NOT use gold or silver prices to produce calculated gold prices.
  • It is NOT a price prediction for paper gold contracts on the COMEX.
  • It is NOT a timing model. You shouldn’t TRADE based on this model.

What the above graph DOES do:

  • The model shows an estimated value for (annual average) gold prices based on macroeconomic variables. It is a valuation model.
  • The calculated gold model uses official national debt, crude oil, and the S&P 500 Index as input variables.

…An examination of the [above] graph shows that:

  • Calculated prices approximately match the annual average of daily gold prices.
  • Calculated prices may bottom and rally several years before the paper gold price bottoms and moves upward.
  • Calculated annual prices don’t reach gold’s high and low daily prices because daily prices spike too high and crash lower.
  • Buying for the long term makes sense when daily gold prices are low compared to the “calculated” price. (Think early 2019.)
  • Selling a portion of core positions is sensible when daily prices are well above “calculated” prices, such as in 2011.

What Will Gold Prices Be In Five Years?

I don’t know, but almost certainly much higher. The model depends upon:

  1. national debt (which will be much higher).
    • National debt will rise rapidly. The 100-year average increase is almost 9% per year, every year.
    • Current economic conditions, no credible spending restraints, “QE to Infinity,” and the coming recession will boost deficits and debt into the stratosphere, even without more wars.
  2. crude oil prices (which will probably be higher in five years).
    • Crude oil prices rise and fall. They traded below $11 in 1998, reached $147 in 2008, but moved below $30 in 2016.
    • Mid-East tensions and inflationary expectations are rising. It’s reasonable to expect crude oil prices will not fall much from current levels and might rise considerably
  3. and the S&P 500 Index (which will be flat to higher—maybe).
    • The S&P 500 has risen from 100 in the 1960s. It is overvalued today and likely to fall, but in the long-term it will rise as dollars are devalued. Assume it corrects and then rises slowly. Remember, the S&P 500 collapsed over 50% after its 2007 high.

The Results

A close up of a map Description automatically generated

Summary

  • The model is not a prediction or guarantee…but it has a nearly five-decade history of success. Correlation for the annual model since 1971 is 0.97. The R-Squared value is 0.95.
    • Buy when the market price is at or lower than the calculated gold price, such as now or after the next correction.
    • Sell when market prices drastically exceed calculated fair value, such as in late 1979, early 1980, and July-August 2011.

Conclusion

…The model, depending on assumptions for debt increases, crude oil prices and the S&P 500, suggests a fair value of $2,500 to $4,500 in five years. A spike much higher, perhaps to $10,000, is not unlikely.

Editor’s Note:  The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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