Investors: Need a Dollar? All That Glitters Is Not Gold

It’s no secret that we’ve been bearish on gold for some time. We view the metal as just that: a metal, not a currency. We’re not blind to gold’s historical use as a medium of exchange, but the fact remains that no country in the world today uses gold for money.

For all who quickly point out that every fiat currency ever used eventually failed — sorry, but that’s not completely accurate. The fiat currencies in use today haven’t failed … at least not yet … which makes them different from hard-asset currencies, all of which have failed.

No, we don’t endorse fiat currencies, or even hard money for that matter. What countries use for their currency is up to them. Our goal is to estimate how markets — including precious metals — and economies will change over time… which brings me back to gold.

After dropping from $1,900 in 2011, the metal has languished near $1,200 or so for more than a year. At the beginning of 2015 it sat at $1,183, then shot up to $1,300 by the middle of January as the equity markets sold off and the world worried about Greece.

In the weeks since, Greek leaders have toned down their rhetoric, the markets have regained a solid footing, and gold has fallen back below $1,200. Many people are asking if this is a buying opportunity. From our perspective, the answer is: “Not yet.”

A quirk of the gold market is that the metal is typically priced in dollars, much like oil. So as the U.S. dollar strengthens against other currencies, gold will typically fall in price. That’s why the steady gains by the greenback over the last year pushed gold down near its lowest point since 2010.

Even though the U.S. dollar is at decade-highs against the euro and multi-year highs against the yen, we believe it has more room to run as the central banks controlling those two currencies continue with easy monetary policies. With deflation a much more likely scenario around the world and the U.S. dollar gaining ground, the case for a near-term spike in gold is weak.

And then there is supply and demand.

On the supply side, the cost of mining an ounce of gold used to be described as the cash cost, and was estimated at $500 to $800. This implies that when gold spiked above $1,900 miners were raking in over $1,100 in profits. Except they weren’t.

After accounting for the costs of building new tunnels at existing mines, management, taxes, etc., miners realized profits were much slimmer than most people thought. In the past few years the industry developed the all-inclusive-sustaining-cost of gold, which includes the expenses listed above, and is at least $1,000 per ounce. This makes gold mining a slender margin endeavor when the price is under $1,200.

With that in mind, many assume the price of gold cannot drop below this level. Who would keep producing at a loss? The answer is, “Everyone,” at least for a while.

Mines aren’t simple operations. With huge investments in infrastructure and labor, miners would lose much more by shutting down and then trying to reopen when the spot price falls below the price of extraction. It can’t go on forever, obviously, but the spot price can — and we think will — drop below the all-inclusive-sustaining-cost in the months and years ahead.

As for demand, this is a moving target. We’ve seen several stories of substantial purchases by the Chinese government, buying binges by Indian consumers worried about the rupee, and Greeks preparing for a Grexit. Some or all of this might be true, but so far none of it has created upward price pressure.

The latest burst of demand is supposed to come from Apple, which just unveiled the new Apple Watch.  A fancy version of this wearable device is encased in gold, said to be about an ounce. If Apple sells a gazillion of these, then sure, demand will spike — and just like that, a new bull market in gold is born!

Or … not. 

The fine print of the new offering from Apple shows the gold watch will cost as much as $17,000. And it’s not your everyday gold — it’s “Apple gold,” which the company describes as twice as hard as standard gold.

The distinction between the two could change the description from the five letters of “Apple gold” to that of “fool’s gold.” So far, the metals markets aren’t front-running the boost in demand from this very expensive product by pushing up the price of gold.

With a strong dollar, inflation nowhere to be seen, a steady supply and no spikes in demand, we see gold drifting lower as we make our way through the rest of this winter economic season, dipping below $1,000 before it’s over.

Which brings up an interesting point: While we do forecast the price of gold will drop, we know it won’t last forever. As with all things, the market will change in the years to come. For our subscribers to Boom & Bust, big changes down the road will be discussed in the April edition.

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Rodney

Harry Dent’s Most Disturbing Prediction in Years

Harry Dent, one of the most respected economists in the industry, has uncovered a disturbing market event that could soon devastate millions of investors. In short, he has undeniable proof that one of the market’s safest and most popular investments is about to get slaughtered… and it will have dire consequences for those who don’t prepare right away.

For full details on the event Harry’s dubbed as the “Safe-Asset Slaughter”… and to ensure you escape the coming carnage, I urge you to watch this special presentation.

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Categories: Gold

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.