For anyone interested, this is a small portion of what I am looking at when considering the price of gold over the next couple of decades as we go from current commodity inflation to future commodity deflation.
I will combine a few key technical and fundamental points that make me believe why we have not seen the long term top for gold yet.
The first chart is the long term GS commodity index chart, as you can see on the chart, this rise in commodities between 2000 and 2008 has been the shortest that I can find going back in the commodity price records.
The next chart is the USD index. The numbers on the chart are the USD gold price starting from the low of $255. On the left hand side of the chart the USD has been ranging and every time it has moved toward 72 on the index, gold has hit a new high. In my opinion the USD will continue to trade in a range until gold hits its ultimate peak.
The next chart is another USD index chart showing the percentage gain/loss of gold relative to the commodity cycle and the USD. I have a projection for the gold price in the right hand corner based on historic gold moves and what we should expect if the final high for gold was $1923.
People that have read my posts in the past are aware that I am a gold bull. I will remain a gold bull until the time and price cycles play out.
I believe that a 70% decline in the gold price after a long term top is reasonable historically speaking, this is why when people were calling the top in gold the FINAL move up, I was pointing out that the gold price will drop well below 50% of the high quickly, and it will REMAIN AT DEPRESSED LEVELS FOR AT LEAST 15 YEARS!
If these assumptions are correct what gold price would be required for miners to survive a 60-70% decline in the bullion price???
A 70% reduction from the $1923 high gives us approx $577. I added a time factor as well of 20yrs which is around the historic average.
Lets briefly consider some gold mining fundamentals. Considering what has come to light recently about total gold mining cash costs.
How many miners will be able to bring gold to market for $577 in 20yrs from now?
They will need
1. cheap energy(possible but not likely IMO)
2. cheap labour(not possible considering the debasement of currency over a 20yr period and that workers are paid in fiat currency, most low cost producers are in unstable regions where supply cannot be guaranteed)
3. sustained or increasing gold ore grades(not possible as everyone is looking for gold and no one is finding it in sufficient amounts.
Notice on the chart gold has gained a "paltry" 650% during this bull market, historically this is very low, the lowest in over 100yrs of gold bull markets and what is absolutely amazing is that this below average move up in gold has occurred when there have been the BEST FUNDAMENTALS FOR GOLD IN LIVING MEMORY!
IMO a conservative long term gold target would be 1000% from the low of $255 taking the price to $2550
A 70% decline from $2550 would be an average of $765 in the following 20yrs. That sounds more reasonable to me, but I still don't know how miners are going to get around declining ore grades.
Some food for thought.
I remain bullish and playing the longer term probabilities.
There will be some great short plays in gold like the one we saw in USD gold between 2011 and now. I am only interested in the long term trend.
Good luck to all the gold bears and I hope for your sake that if you are short gold, you are an excellent nimble trader and that you experience the shortest commodity bull market in over a century.
You know where my money is.
The above is purely my opinion and NOT TRADING ADVICE.
