Either the gold bull market is over or it's not. If it's not, then gold will hit $2000. But when? I decided to use actual numerical data (monthly prices) instead of drawing lines on a goddamn chart.
Can we estimate a parameter that captures the price action for the entirety of the bull market thus far? That's 12+ years of data points, so assuming the bull market isn't over (and again, everything that follows here rests on that assumption), extrapolation becomes a decently safe bet.
Turns out the monthly closing price of gold since 2001 has increased at a remarkably steady rate. The data points somewhat surprisingly satisfy the main assumptions of a (log) linear regression model (which can be checked by various diagnostic measures that I won't get into). The one violation is that prices constitute a time series, so the *signs* of month-to-month differences will be correlated, but there are fairly dependable ways to correct for that when they're not too glaring.
How well does the model perform? The 99% confidence interval for the expected monthly change is remarkably tight: between +1.042% and +1.050%. The 99% confidence interval for each month's price is depicted as a capped error bar (grey). At the center of each of those error bars you can imagine the best point-estimate for price that month. The yellow band covers the 99% confidence interval for what that best estimate is, each month. It's fairly wide, mainly because I used a more conservative calculation of standard deviation that takes into account that we're dealing with a time-series, and prices are correlated.
The green dotted line depicts when gold is expected to close a month at $2000 (June 2013); the blue dotted line depicts the most conservative estimate for when price is expected to close a month at $2000 (November 2013); and the purple dotted line depicts when the lower bound of the 99% confidence interval passes $2000 (August 2014). Note that the upper bound of the month-to-month confidence intervals passed $2000 only in May 2012.
Another way of making linear regression more amenable to a time series is to take averages and use intervals. On the following chart, I use quarterly data, namely, the average closing price of the 3 months per quarter. That satisfies the linear regression even better, but the sample size is smaller, and the predictions are similar. Note that for the quarter starting this April and ending in July, it would be outside the predicted 99% confidence interval if gold's average monthly close lands below $1600.
I'd say that if price falls out of these intervals, then (and probably only then) should anyone say the bull market in gold may be over.
20 comments:
The World of the Precious Metal Blogs.
As a holder of PMs I'm trying to wean myself off of the PM Blogs. It's a strange myopic World. I'm trying to go "Gold-turkey" so to speak. As a few examples:-
King World News: frantically bringing you yet another "astounding" piece by some "famous" guru in-charge of $Billions who urgently tells you that Gold is about to break-out to astounding highs. This has been going to happen for at least five years.
BrotherJohn: "iInfamy, infamy, they've all got it in for me". The great conspiracy that only he and a few Silver bloggers Know about and the rest of the World is ignoring. Always explaining that his charts are telling him the price of PM's could go either way. Can never make a decision about it. When the break-out comes we are talking thousands of percent rise. Hasn't happened for years.
Silver Doctors: Yet another "smack-down" by the evil manipulators and their friends at the government's bidding. Silver Doctors always follows this up with an opportunity for readers to buy more of Silver Doctors Silver.
FOFOA: "Intellectuals Club" for people with a lot of time who like to talk to each other about the nuances of the financial World and in particular about Gold. A lot of "superiority complex" being displayed but with deep down averice. They are all really hoping for a big pay-day when FreeGold happens. It hasn't happened and they've been talking about it for many years, but hey, it's just around the corner. Must watch your P & Q's here and on no account question God (or whatever his name is) it's disrespectful.
Silverfuturist: Enthusiastic, word stumbling, likeable, chicken feeding, farm tool, Silver and Gold enthusiast that actually sometimes talks a lot of sense. Very likeable character.
Screwtape Files: Moments of brilliance interspersed with very long periods of the "doldrums". Lots of little furry animals with big eye drawing pretty pictures that they hope will open the door to a magical World of ………….?
Guilty as charged - our use of furry animals makes a great literary device. I am upset that other blogs don't have as many.
@Duggo, it takes a lot of effort to create good content; unfortunately you are missing out on a few great background conversations going on about the nature of the ETF's, the recent reclassification of the SLV 'Brinks London C' vault section (59 million ounces) and much more.
I'm still betting on sideways price action for now; I think GM's law of the 21st century bull market looks like holding quite well. But as one who has weaned himself off many blogs already (but not the liquor), I recommend the gold turkey of which you speak.
I like posts like this which reaffirm my 'autopilot/hold' trading approach. I'm also keen to see Jeanne's reaction when we hit $2000 gold, and hoping she has time to write again in June :)
Warren,
Excellent work (again). Two questions for you:
1. If possible, could you do your analysis, but use Euros instead of dollars? I am curious if that would change your conclusions or just give the corresponding Euro prices.I would do it if I knew how :)
2. Have you ever found this type of chart pattern ("...the monthly closing price of gold since 2001 has increased at a remarkably steady rate.") in any other traded commodity? If yes, what? If not, can you speculate as to why?
Many thanks!
Milamber
Or GM. I thought Warren did the post, but i now see that I was looking at his name on a comment (in response to Duggo).
In any event, I would love to read the opinions of the various Screwtapers to my 2nd question.
Milamber
I think duggo is just suffering from blog fatigue. The blogosphere has created the expectation of a steady drip of stimulating content, and when the news flow doesn't support this, the natives get restless. Turd's blog is a particularly egregious example: when talk of the collapse of the $IMFS walked hand in hand with a spec bubble in gold and especially silver, daily content was easy. Since then, not so much. Cartels and evil empires make easy daily filler; meanwhile, Rickards argues that “currency wars” last 15+ years. We've only just begun.
It's pretty clear that this post is idle speculation. The underlying assumption is that there is some constant, (log-)linear factor driving the price, when no one believes that's really true. All that said...it's great fun! Let the descent into geekdom continue!
Have you considered using the MoM price change instead of the price? I would be curious to see what would happen if, given a distribution of these changes over the last decade, if you were to sample from this distribution, how frequently would you recapitulate the same/similar price action? Going one step further, comparing this naive model with an autocorrelation model, where you draw from a distribution of this month's price change given last month's change, might be interesting as well.
duggo, I agree with you on silverfuturist. His intellectual honesty is refreshing and his enthusiasm is contagious. If you're not doing what you're doing with both those virtues, then don't do it, I say.
I think Biosci is also correct that there's a lot of forced material on the metals blogs. E.g. I don't envy Turd for having to put out a commentary every single day. I guess it's worth it for him since he's made a lot of big name contacts and probably makes a fair profit from his site (and stands to make much more if gold ever has another 2011 type run). But his lack of enthusiasm lately is palpable.
Thanks for the ideas Biosci - I'll try the sampling exercise when I have free time, maybe this weekend. The conditional distribution stuff would be harder to pull off. I tried some regression models that correct for autocorrelation as I mention above, and the line of best fit was surprisingly constant. But setting up "confidence intervals" for forecasts with those models isn't straightforward, I'd have to do some reading which I don't have time to do now. Frankly, I'd be more inclined to do that type of stuff if I had more numerical data. Monthly closes are fairly arbitrary. How many quantitatively inclined dudes would outperform a lot of hedge funds if they had access to info in real time and the ability to high frequency trade? I have a thousand ideas, some of which may even work, but I'm stuck with drawing lines on a chart.
I will disagree (slightly) with your point that this point is "idle speculation." While it certainly is the fruit of idleness, and no doubt speculation, I wouldn't call it idle speculation. You say "The underlying assumption is that there is some constant, (log-)linear factor driving the price, when no one believes that's really true." I don't know if I necessarily agree with you. Say we could rewind time back to the year 2001 100 times, in parallel universes as it were, and let the experiment repeat itself (the philosophers among you who have disproven free will as I have may interject that the same exact thing would happen 100 times; so let's say we kill a few butterflies (and a few bankers) and start the clock). I think there are powerful forces that have moved gold in such a steady manner for 12+ years, and their net "force" is not unlike a parameter that actually exists in nature and is waiting to be "discovered." The girl I met at the bar Friday will sleep with me with probability X. That probability exists even if only God (or more likely, Satan) knows it, and it's up to me to estimate it using all the data I have (e.g. based on other girls I met who looked like her, talked like her, had a similar age, education, IQ, digit ratio, peed standing up into a urinal as she did, etc.) So I think a certain "growth force" for gold has been pushing it up over the past 12+ years, and because the action has been so steady, I think the 99 percent confidence interval for the MoM estimate isn't meaningless; I think it's conceivable that 99 out of 100 times, if we let those parallel universes proceed to today, we'd get an average increase within that range.
Warren, though the expected date is June, November feels more likely for me, or else even the summer of 2014, the way I think TPTB will want to keep gold from hitting $2000. I really don't see how so many savvy people think powerful entities don't give a shit about the price of gold -- it does send a message. Anyway I did this exercise mainly to help me decide how aggressively long I should go when gold dips over the next month, as I predict it will. My conclusion at least for now is not that aggressively.
miliamber, thanks - I coul dlook at euros if I could get a list of prices. But the chart shows that the bull market in euros (if I recall correctly) didn't start a steady incline until ~2005. So there will be fewer points to work with.
I too have wondered whether other assets have gone up 12 years in a row like gold has in such a steady manner. Anyone with info, please chime in.
GM,
I admit I overstated the case, in my eagerness to make the transition to talking quant. Indeed you could argue that the long-term fixed gold-oil ratio is the fundamental fact from which a lot of modern macroeconomics is derived, and that the rise in gold over the last decade represents a managed decline of the dollar, but how that ratio came to be fixed – and especially how that management has been so orderly – simply eludes me. My main quibble, I suppose, is the implication that said orderly decline has been maintained since 2008 and will continue to be so. Which, after reading what I've just read, seems like a perfectly reasonable implication. Hmm.
As for the sampling exercise, it's simpler than it sounds. Once you've constructed a model to generate prices at each timepoint, just run it a few thousand times and collect appropriate stats (mean + stdev or empirical 99% interval) at each timepoint. It's a few lines of python/matlab/R; I'd do it myself if I had the data. As you well understand.
Nice post, GM.
Quick question: so if gold spot price drops below, say $1530 next month, does that mean the gold bull market is over? (Your chart no. 2)
Or do we perhaps need to take another track, and try to predict where the gold price should be, given all this currency debasement.
Yes, one thing I keep meaning to do is to create charts of what the gold price should be. Now, I see two obvious measures: one is the gold spot price if it went up perfectly with inflation since, say, 2001. Or 1972, if one prefers. That's an easy chart to produce, and it predicts a massive crash in gold spot price (or a big 'correction' if one is queasy about saying 'crash').
The other, of course, is to compare it with the rise in other assets. This you do already, with your comparisons with the CCI, etc. But that's tricky, because who gets to decide on the make up of the basket of assets? Freegolders and suchlike would say that gold is the only plausible measure of currency debasement. I disagree, as would many others, but it is harder to agree on what asset or combination thereof we should compare currencies to if not gold (which is simply a barbarous relic).
But a formula should be possible in which we throw in general inflation as well as currency depreciation against a basket of assets (houses, oil, other commodities, food, whatever) and out will pop the price that gold should be. I submit that regardless of the precise algorithm chosen, gold will be currently very overpriced. Which is why I keep saying it is 'expensive'.
And this is why my little lemur purse is still staying firmly closed.
JdA
Good stuff, Biosci - I'll look into that. Care to elaborate on gold:oil? I know VtC is big on that. I haven't given it too much thought (also what's the deal with BRENT? IIRC the ratios are different).
JdA - not so fast - the second chart shows gold's average monthly close per quarter. It can fall through on a daily basis. (I should've mentioned that the current quarter's data point is incomplete, i.e. the average of January's close and February's present level) So, for example, this month could finish at $1550 and next month at $1450, and gold would still fall within this quarter's error bar.
I agree it's helpful and important to see how gold is doing vs. other real things, some of which you can actually eat. I don't know how I would start quantifying what gold's price should be, though, because it's so much more than a passive gauge of inflation. The fact that you can store it and sell it at any point in time and space alone is a huge component that obviously increases at some exponential rate as more people come to understand that central banks exist to maintain and increase the political, legal, and economic dominance of the rent-seeking finacial elite.
The main point of gold is not that it would be an inflation measure. No way. Just take a look at some historical data. It's simply not true.
The point is that since about 2000, it is the real price of gold that has been increasing. And this is putting the dollar between a rock and a hard place.
Firstly, the real price of gold has been increasing (1) because the Europeans stopped suppressing the dollar price of gold around 1997-1999 by not expanding their leasing programme any longer and by calling back some of the leased gold; and (2) because emerging market central banks and ordinary people have kept purchasing gold, also since about 2000, with a good portion of their surpluses. This is because of the monetary value of gold (as opposed to its "commodity" value which plays little role in view of some 150000 tonnes of above ground stock which will never end up in dental fillings irrespective of price) and is the reason for the increase in the real gold price.
On the other hand, there is quite obviously an agreement to fix the gold/Brent oil ratio at 15 which has been in place since 2009. Coincidentally, already in the late 1940s, the gold/oil ratio was at 15. This ratio has been the key constant of the post-war global economy and geopolitics, yet, everybody remains silent about it. This arrangement of fixing the gold/oil ratio is key to the international function of the dollar: (1) without any artificially low gold/oil ratio, there would be little incentive for oil exporters to sell for dollars and accumulate dollar reserves; and (2) without the demand for dollars from the international oil trade, the dollar would look more like sterling in the 1950s and 1960s (JdA, ask your parents/grandparents about capital controls, wealth tax on emigrants etc.) than like the dollar does today.
The problem is that the oil price determines a good part of the general price level.
One day it will break. Question for the audience: Will the gold/oil ratio break through 30 or through 10?
Victor
It is not my intention to try to redirect this most interesting chain of comments. I am assuming that where the price of gold may go in the near future is germaine to this post.
Gene Arensberg, of Got Gold Report fame, puts out a subscribers only report on the changes in the Weekly COT Reports. He has now posted the latest one in the open (http://treo.typepad.com/files/20130218-ggr-cot-notes.pdf) which is very informative reading.
Here are his conclusions:
Bottom Line:
Here’s the executive summary:
Gold blew through the stop herd in the $1,630s and tested the high $1,590s, closing just above $1,600 mainly on the selling of short contracts by Managed Money aka The Funds.
The Funds are pulling a short raid while hanging onto their long contracts, a tell.
The Legacy Gold LCNS.TO has entered the top of the zone we consider bullish in a contrary sense. That occurs frequently at or very near gold lows.
The producer Merchants are at their lowest net short gold position in years. The lower the LCNS the more likely gold is about to turn higher.
Managed Money traders are at a very low net long level. Similar to where they were last summer with $1,580 gold.
Managed Money “got there” by putting on a record high gross short position, about half of which was added only in the past three weeks with gold then from the $1,650s to the $1,690s.
Very high MM gross short gold positions have usually been very short term events. They are usually very bullish in a contrary sense, but they scream to us that the futures market has now become hugely imbalanced – and therefore dangerous to both sides of the battlefield, very short term.
Extremely high Managed Money shorts in futures are normally the highest of high octane rally fuel for gold.
Managed Money chose to put on the extreme high level of shorts for gold, but not, repeat NOT for silver futures, another tell we believe.
At some point the Funds will move to cover those insurance shorts. When they do it will be difficult or impossible to keep it a secret. Nimble locals and smaller traders will likely attempt to front run their covering which could lead to a major imbalance of positive liquidity for short periods of time in the near future.
Momentum currently favors the Big Sellers (in this case the Funds). Additional selling on pure momentum is possible, but we look for gold to find increasingly staunch support forming and dramatic physical offtake if gold shows a “15 handle” just ahead.
You can just feel Stevie's dirty paws in the ticker... http://bullmarketthinking.com/sac-capital-partners-bets-a-quarter-billion-on-gold-silver-mining-shares/
I hoped VtC would jump in and rescue me. However, at the risk of sidestepping some really interesting questions, I'm going to bring the topic back to modeling the PoG. I downloaded the gold price data and did some preliminary modeling and kept getting results that predicted vastly greater variability than we've seen to date. I'll spare you the details but the root cause seems to be that volatility has been increasing over time; if you apply any of today's rates of change to the early period prices, the exponential effect causes wild fluctuations. To see the volatility increase, have a look here:
timesink
For the record: I am NOT hawking a blog. It just seemed to be the best place to convey more info.
Awesome work Biosci - it's remarkable how that steady increase in std deviation is indiscernible by inspecting the log price chart. Do you think you could come up with a good model incorporating that change in volatility? Btw, are you starting a new blog? If not, feel free to post whatever you've found/ continue to find here.
GLD Puke triggered!
Thanks, GM. I'm definitely not starting a new blog; I registered that site years ago but never followed through. I'm a compulsive puzzle solver but the rest of my creative capacity is pretty much consumed by work (cancer research, very broadly speaking). I'd be happy to contribute what I come up with, though, if anything comes of it. More tomorrow on gold:oil, but thanks again to Victor for getting the ball rolling.
Key question: how much to invest in the GLD puke. Hmm.
That would be great Biosci. Even if you have time for nothing else, I'd at least like to repost your linked stuff here. If you're interested email me at grundlemaster@gmail.com, we'll get you an avatar
@ S Roche
Another 9 tonnes down yesterday...almost puke worthy
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