Gold Investment Mistakes In Today’s World : The Idiocy of Peaking Gold In Future Market
Tue, Mar 12, 2013
Is Gold investment Mistakes ? OR Good ?
One of the common pundits we like to learn from here at Contrarian Insights are the neo-Multhusians.
They see crises forming everywhere they look. They see “Peak Everything” from food to gold to oil.
From Thomas Malthus predicting the end of the civilized world before the population exploded 300 times over to Paul Ehrlich who has predicted imminent mass starvation for nearly 40 years now and still has an audience, they’re out there and they always will be.
But we have nothing personal against them. We just don’t like they cost so many people who invest according to their dire predictions money.
They discount human ingenuity and the natural course of expanding prosperity when government doesn’t get in the way.
The latest in the “Peak Everything” crowd prediction came in response to the recent drop in gold prices.
The chart below shows the hypothesis that Peak Gold will have on the Future Price Of Gold:
Everything in the chart looks fine.
It shows the rate of both the size and number of gold deposit discoveries has declined significantly over the last two decades.
The chart also shows the price of gold has gone up while the number of new discoveries has declined.
The two variables look highly correlated. And to new and potential Gold Investors the situation looks extremely enticing.
However, the Peak Gold theory displayed by the chart is completely wrong for two reasons.
First, annual gold production has very little impact on the total gold supply.
Consider this. Since gold is not consumed and its dominant use is for jewelry and investment, most of all the gold ever mined currently rests in a vault, safe, or jewelry case somewhere.
So all the gold every produced now totals 165,000metric tons.
The annual gold production is currently at 2500 metric tons.
That total production is less than 2% of the total gold supply. It’s almost nothing. And it has little to do with the price of gold.
Remember, gold is not like copper and silver where current supplies are depleted so the price is determined by supply and demand. Gold prices are largely determined by a much greater factor than supply and demand.
As we’ve been over before, the real determinant of the price of the gold is a mix of inflation rates and interest rates. The combination of which determines the real interest rate which practically sets the price of gold.
When inflation is high and interest rates are low – like they are now – gold is worth far more.
When inflation is low and interest rates are high – like they were in the 80s and 90s – gold prices are low and go nowhere.
The chart below shows the sharp correlation between gold prices and real interest rates:
As you can see, there is a near perfect correlation between the price of gold and the real interest rates.
That’s what gold investors need to focus on.
Right now interest rates are rising and inflation is slowing (in anticipation of a further slide in GDP growth), so naturally gold prices are sliding as well.
The price of gold will turn back up when inflation increases or interest rates start to drop again.
Until then, don’t listen to all the “Peak Gold” advocates. They’re just putting out fodder for the masses to consume.
They are dangerously wrong because their mistakes and illogical theses have been covered up by a steady bull market for years. Now that the market isn’t making up for their mistakes, their theories are being proven wrong.
Sure, this thinking is a bit outside of the mainstream. But don’t worry though, it happens all the time.
Your editor spoke out about the foolishness of the “Peak Oil” crowd in 2007. We warned of an oil price collapse when oil was well over $100 per barrel.
Now a few years later the U.S. is on the verge of energy independence, domestic oil production is soaring, and those uneconomical alternative energy projects are going bust each week.
Stick to the facts and the trends that really matter. You and your portfolio will be fine.
Executive Editor, Contrarian Insights
The Group of Big Investors in United States.
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