Gold Value and Gold Prices From 1971 – 2021
An Empirical Model
By Gary Christenson
What is an appropriate exchange rate for gold in 2015 when priced in US dollars? What will be the appropriate exchange rate when priced in Euros in 2017?
We don’t know.
Worse, a number of highly intelligent and recognized experts can’t even agree whether gold will be priced higher or lower in three years.
Given that major disagreement among experts, who and what should an investor believe regarding the exchange of steadily devaluing dollars, euros, pounds and yen for the purchase of gold?
My solution was to create an empirical model based on several macro-economic variables, not including the price of gold. The goal of the model was to accurately replicate the smoothed price of gold as calculated with a twice smoothed moving average of monthly closing prices since 1971.
The model performed well – specifically it had a 0.98 statistical correlation with the actual smoothed market price of gold in US dollars between 1971 and 2013. The resulting graph of calculated gold prices rose from about $30 in 1971 to about $500 in 1980 - 84, down to under $300 in 1999 - 2001, and then up to about $1,500 in 2013.
Currently the model shows that gold, selling for about $1,300, is undervalued and therefore likely to move higher in coming years.
But how much higher?
The book discusses reasonable projections based on the estimated change of the macro-economic inputs to the model and then calculates reasonable or “fair” values for gold through the year 2021.
Of course the price of gold will rise above and fall below the calculated “fair” value during the next several years, but estimating the “fair” value will help people evaluate whether or not the market price of gold is over or under valued at any particular time.
The model indicated that the market price of gold at its peak in August 2011 was 30% higher than the “fair” price.
Similarly, the market price of gold in December 2013 was 26% below its “fair” price.
This “fair” value information would have been particularly valuable to those who were considering purchases of gold in August 2011 or selling their gold in December 2013.
The model accurately replicated, on average, the smoothed price of gold for over 40 years. Furthermore the model was robust. Since 1971 the world has experienced stock market booms and busts, bond market bull and bear markets, “shock and awe,” occasional peace, the inflationary 1970s, the stock market booms of the 1990s, the devastation of 9-11 and subsequent wars, a housing crash, and a global financial crash in 2008. The model created accurate “fair” value estimates for the price of gold during all those market extremes.
The book is divided into three parts.
Part one explores the need for an empirical model, examines monthly gold prices since 1971, smoothed annual gold prices, the macro-economic variables used in the model, the actual formula that replicates smoothed gold prices, and future gold prices as projected by the model. It also discusses gold cycles, various ratios, and shows how those cycles and ratios support the price projections indicated by the model.
Part two addresses the larger economic environment including counter-party risk, The Fed, interest rates, QE, inflation, and central bank gold sales.
Part three encourages you to act in accordance with your individual financial circumstances and risk tolerance. It offers suggestions on how to purchase gold, where to purchase and store gold, when to buy and sell, and what a bubble in the gold market could indicate for prices.
The model has a 40+ year record of calculating a reasonable and “fair” price for gold. There is no guarantee that the model will continue to be accurate in the future, but the model is certainly more useful and objective than the opinions of many supposed experts and biased analysts who materially disagree on future expectations for gold prices.
Length: 148 pages, Paperback $12.99, eBook $7.95
Table of Contents:
Introduction – Why we need a model
Part 1 The Gold Empirical Model – a GEM
1. Experts who don’t agree
2. Gold prices – the last 42 years
3. We need a model
4. The model uses macro-economic variables
5. The empirical formula used in the model
6. Results from the model
7. Gold prices projected into the future
8. Gold prices are managed and manipulated
9. Is $10,000 gold possible? What would be necessary?
10. Gold market cycles
11. Gold ratios to the Dow, silver, and crude oil
12. Gold – the big picture
Part 2 More Reasons to Own Gold
13. Counter-party risk
14. The Fed, interest rates, QE and inflation
15. Central bank gold sales
Part 3 Action Plan
16. How and where to purchase gold
17. When to sell gold
18. Market bubbles and implications for gold prices
Notes, additional analysis, and further commentary on gold prices
References and internet links
The Deviant Investor