How much will an ounce of gold be this time next year?
November 16, 2010 9:05 AM   Subscribe

Will gold and/or silver be 'cheap' again anytime soon?

Going on the assumption that precious medals are experiencing a bubble similar to stock market bubbles of the last decade, is it reasonable to expect these commodities to devaluate as quickly? By as much? Looking at charts of the value of gold and/or silver, they have shot up in value - can this be sustained? Or has there been a fundamental change in how they are valued?
posted by From Bklyn to Work & Money (23 answers total)
Well, no one here is going to be able to tell you when, or if, commodities prices will decline.

That said, there is a growing chorus of people who think that gold is in a bubble.

On the other hand there is also a clamoring for a return to the gold standard. If there were a return to the gold standard, that could bid up prices even further.
posted by dfriedman at 9:10 AM on November 16, 2010

No one knows. This is not answerable. If you could accurately predict this it would be easy to start swimming around in money.
posted by zephyr_words at 9:10 AM on November 16, 2010

For any commodity, there are a number of people who are specialists in what they expect it to do, and the price will reflect that. I don't think most individuals can outguess commodities, and I've seen people lose big trying.

MeFite Mutant is an awesome resource, and one of the few 'strangers on the Internet' whose advice I would value on market matters.
posted by theora55 at 9:13 AM on November 16, 2010

Commodities equal financial death for the average joe. Why? Because supply is unknown, yet flexible, and it can be gamed at the source.

Think about oil futures. Oil futures are gamed regularly by oil-producing nations, who protect information about reserves, production, etc. Gold, wheat, pork-bellies, frozen concentrated orange juice ... all the same.

Unless you're an expert, stay out.
posted by Cool Papa Bell at 9:19 AM on November 16, 2010

Best answer: This is all speculation: you usually need to pay for genuine investment advice and even then it could be wrong.

Commodity prices, especially precious metals have almost always increased during a recession. By that logic, when/if this recession ends, the prices will likely come down. That being said, while the price in dollars is at record levels, the inflation-adjusted price is still quite a ways off of the historic high. The inflation adjusted high was when gold hit $850 in 1980. That $850 would be the equivalent price of around $2350 today.
posted by Mister Fabulous at 9:20 AM on November 16, 2010 [1 favorite]

Best answer: heres my .02: QE2 is going to backfire. "Success" of QE2 is defined as asset inflation, so the bond market prices it in now with higher rates, which hurts growth and stocks. With little growth, there is little inflation, so real rates in USD are higher, so USD climbs against other currencies, which combined with the slow growth zaps commodity prices.

Talking my book of course, but this time next year gold will be sub-1000.
posted by H. Roark at 9:23 AM on November 16, 2010 [1 favorite]

Response by poster: I won't hold anyone to a 'prediction.' I'm actually looking for shirt-cuff analyses like Mister Fabulous and H.Roark's. And though I appreciate C.P.B.'s very sound advice, I already own a gold-plated fountain pen and don't think I can afford to get anymore invested than that. I wonder if the internet and the ability for anyJoe to invest in gold/silver ETF's has had a significant effect in the expansion of trade in these commodities? Had the market substantially changed?
posted by From Bklyn at 9:44 AM on November 16, 2010

Yes the market has changed dramatically and a large part of that is the advent of the gold and silver ETFs. They are essentially the marginal buyer for gold. If you were to draw the conclusion that gold is a bubble you would probably place a great deal of the blame at their feet.

If you do a bit of googling the data is pretty easy to come by. FTAlphaville also addresses this exact topic regularly
posted by JPD at 9:47 AM on November 16, 2010

Best answer: They are essentially the marginal buyer for gold.

I think the mechanics of ETF's are seriously misunderstood. When you buy GLD or SLV or SPY, the trust is not holding some quantity of gold/silver/sp500 stocks for you. Its nothing more than a vehicle that should track the price of gold. The existence of the ETF's have very little impact on the supply demand mechanics of the physical market.

In a nutshell, the way the etf's work is there are 2 types of participants. The normal people and the primary dealers. The difference is the primary dealers are the ones who can create/redeem the etf for the underlying, the normal people cannot. This mechanism creates an arbitrage for the primary dealers, so it keeps the price inline. For example, if GLD was 10% higher than spot prices, the primary dealer could buy the spot and take the gold to the GLD trust and say "give me shares of GLD for my gold" and make the risk-free return on the 10%. For everyone else, you are just exchanging paper with your counterparty.

But understanding that, hopefully you can see how the ETF's really have little impact on the underlying physical.
posted by H. Roark at 9:57 AM on November 16, 2010

When you buy GLD or SLV or SPY, the trust is not holding some quantity of gold/silver/sp500 stocks for you.

That is absolutely false. The GLD trust owns almost 1300 tons of gold.
posted by Mjolnir at 10:06 AM on November 16, 2010

How do you think the other side of the swap is hedging their risk?

I mean the way ETF's generally work is that you are buying a swap that exchanges some fixed rate for the return on some underlying asset. The person who sold the swap to the ETF has to at some point either hedge off the risk or is comfortable making a huge one way bet that the underlying is going to decline. So either at some point someone related to the ETF is hedging off their exposure by buying gold in some form (doesn't matter if its physical or financial) or they are taking an absolute ass ton of risk, in which case we should all be short Blackrock.
posted by JPD at 10:13 AM on November 16, 2010

Yes, they have gold holdings but it is not directly related the number of shares outstanding. ie as more people buy GLD every day, the trust does not go out and buy more spot.
posted by H. Roark at 10:13 AM on November 16, 2010

You still need people buying gold to hold the arbitrage. Whether that comes in the form of a swap counterparty hedging their risk or a broker-dealer creating shares in a non-swap based ETF. Otherwise demand for GLD would drive prices > than the price of Gold since there is a finite # of shares and demand is greater than supply.
posted by JPD at 10:29 AM on November 16, 2010 [1 favorite]

A related question that perhaps others can clarify: my understanding -- and this admittedly comes from certain family members who have decided they have a stake in this (which just instinctively makes me nervous, but for no way I can intelligently articulate) -- is that silver is a special case because it's A) commonly used in industrial production, unlike gold, and B) isn't being mined anymore. Is this true? When I look for this info online, all I seem to find are sources that want to sell me precious metals (or at least sell me on the coming apocalypse in which we will all need precious metals).
posted by scody at 10:58 AM on November 16, 2010

A is true, B is not. It is a slightly different case then gold in that its cost of production are not as divorced from market price. I.e. Gold owners would argue that cost of production are irrelevant for a variety of reasons, whereas most silver owners would acknowledge that at some level that matters.

graph of silver production
posted by JPD at 11:04 AM on November 16, 2010

If there were a return to the gold standard, that could bid up prices even further.

Keep in mind that this is a very, very outside possibility. At current rates, the US has about $340 billion in gold reserves. The US money supply (measured as MZM) is just over $9.5 trillion. Similar figures hold for the Eurozone (330 billion euro in gold reserves, 8.4 trillion in M2). I'm not sure anyone has presented a plausible path to bridging this chasm.
posted by mhum at 11:07 AM on November 16, 2010

I think there is a significant X-factor in play that will make gold prices continue to rise faster and fall more slowly than sober analysts may expect-- India's love of gold:

Nowhere is the gold obsession more culturally entrenched than it is in India. Per capita income in this country of a billion people is $2,700, but it has been the world's runaway leader in gold demand for several decades. In 2007, India consumed 773.6 tons of gold, about 20 percent of the world gold market and more than double that purchased by either of its closest followers, China (363.3 tons) and the U.S. (278.1 tons). India produces very little gold of its own, but its citizens have hoarded up to 18,000 tons of the yellow metal—more than 40 times the amount held in the country's central bank.

India's fixation stems not simply from a love of extravagance or the rising prosperity of an emerging middle class. For Muslims, Hindus, Sikhs, and Christians alike, gold plays a central role at nearly every turning point in life—most of all when a couple marries. There are some ten million weddings in India every year, and in all but a few, gold is crucial both to the spectacle and to the culturally freighted transaction between families and generations. "It's written into our DNA," says K. A. Babu, a manager at the Alapatt jewelry store in the southwestern city of Cochin. "Gold equals good fortune."

This equation manifests itself most palpably during the springtime festival of Akshaya Tritiya, considered the most auspicious day to buy gold on the Hindu calendar. The quantity of gold jewelry Indians purchase on this day—49 tons in 2008—so exceeds the amount bought on any other day of the year throughout the world that it often nudges gold prices higher.

If you share economist's near-consensus view that India is only at the beginning of an era of unprecedented prosperity, I don't see how you can be comfortable betting against gold.
posted by jamjam at 11:56 AM on November 16, 2010

Nobody can answer this authoritatively, but you should know that at least some of the voices making a lot of noise about gold's inevitable and ongoing rise are ideologically-motivated obsessives who are trying to make a point about the inevitable decline of the paper dollar.

Like, "trade all your dollars for gold, because the the Jewish Nazi Space Lizards who really control the Federal Reserve -- and their Bilderberg Group minions in the Main Sleaze Media -- are going to print dollars until the collapse of the Ponzi Scheme that is US Currency." Or some only-slightly-less-eyerolling version of that.

This accounts for some, not all, of the voices promising that gold is STILL undervalued even after its recent yearslong skyrocket.
posted by foursentences at 12:13 PM on November 16, 2010

The supply and demand data from would seem to argue against India as being supportive of permanently higher gold prices- jewelry demand is down, and nearly all of the incremental demand for gold comes from investment in physical gold and ETFs. Most Indian demand is in the form of Jewelry.

But betting on a speculative market inherently speculation and never investing - long or short.
posted by JPD at 12:16 PM on November 16, 2010

All I have to say about it is that Glenn Beck thinks gold prices are going up. Invest accordingly.
posted by JackFlash at 2:35 PM on November 16, 2010

Best answer: you can reasonably expect it to stop rallying (and start declining) when mortgage (interest) rates go up or - supposedly earlier - when they are expected to go up. Or possibly when China and India start slowing down their growth. Or someone with fat fingers sells it at the wrong price, or, like an earlier post in the blue hypothesizes (sp), a gold etf blows up
posted by 3mendo at 2:57 PM on November 16, 2010

Here is why I think gold is in a bubble: people are spending money on advertising trying to sell gold. If it is so valuable and going to continue to rise in price, why don't they just hold it? Not even just selling it, but *clamoring* to sell it?

This is a corollary to that adage about when the stock market is so hot that *everyone* is in it and talking about it, that it is a good time to cash out. In other words, when something starts to look like a free lunch, watch out. Selling gold on cable TV to invalids and Fox News viewers strikes me as right about that time.

Gold doesn't have inherent value. A house or a warm coat has inherent value- even if you can't sell it, you can still use it. You can't use gold for anything except a paperweight.

However, it is possible that the gold bubble won't pop, but that the prices will simply remain flat for an extended period of time until inflation in everything else starts to make the price look like a bargain again.
posted by gjc at 7:35 AM on November 17, 2010 [1 favorite]

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