The full article is here: Roubini says oil, gold look overpriced

There is also a lot of misinformation around. According to many gold bulls the demand for gold outstrips supply. But according to the information here: Gold Annual Total Demand and Supply there is no impending shortage of gold and the only real surge in demand has been for ETF holdings but this is just a small part of the annual demand story. (and this can come back into the supply side anyway if ETF’s start selling the stuff off)

The more I look at gold the more I see a bubble.

Is it different this time? (Compared to that 1970s run up and 1980s crash I mean.) It could be for any nation that loses the plot and really does trash its currency.

But I honestly can’t even see the US Fed being that silly? And I’m punting that Oz is even less likely to. So we are looking at a highly tradeable and volatile asset -- Which isn’t something I’m naturally drawn to. And either which way, it is an awfully complex AUD trade for mine right now.

As you mention, companies will be digging up as much gold as they can even when the production costs are much higher than the average. But once the fear premium is removed from the gold price we end up back in the old supply and demand story, and this will not support gold prices as high as they are now in the short -- medium term.

To buy gold at current prices (around USD $950 and ounce) means that I would have to think the global economy is going to get a lot worse or I am waiting to cash in on some unexpected event that will push prices higher. Personally I think we have seen quite enough bad economic news to last us until the next crisis and waiting for an “unexpected” event is akin to gambling, so I will not be buying any gold for a while

About the most convincing argument I’ve heard from the gold bulls is that long term, gold will always buy pretty much the same number of loaves of bread. But given a bit of a think, that tends to tell me that what even the gold bulls really value is bread perhaps? And Yes, in fiat based monetary systems where positive inflation is intentionally targeted, cash is cetainly not something you want to be placing too much faith in to hold its value long term. So I appreciate the very strong desire to look for alternatives.

The following give a bit of a feel for what current production costs of gold might be:

http://www.news.com.au/dailytelegraph/story/0,22049,25407841-31037,00.html

http://www.barrick.com/News/PressReleases/PressReleaseDetails/2009/BarrickEarns371Million042PerShare1120643/default.aspx

Not too many of those producers will be shutting up shop at a price of USD 500 per ounce I suspect. Although some of them will be putting a lot of thought and effort into improving profit margins that have definitely gotten way lower than they’d like to see them.

I also notice that “Russia’s gold output rose 42% in QI, mainly on a better than 51% gain in mine output.” (And you can bet they aren’t producing more because they are losing money on it.)

http://www.kitco.com/ind/nadler/may062009A.html

As I’ve said peviously, at prices of USD 800 per ounce, “everyone” wants to be a gold producer -- This is “make a killing” type material from a producer’s perspective.

It was a good few months ago so I won’t look for the article again, but recall reading that China wanted in a lot at those prices -- As in they figured they had some (or quite a few???) ore bodies that could be exploited very profitably at those prices thanks.

It’s difficult to recall real specifics but about as close as I can recall/judge by looking at prices about that time, one big producer I knew went from a perspective of These are our plans for winding down the show and brace yourselves because it will happen at a price of maybe USD 450 per ounce in 2005 (?) to a plan of Life of Mine extended at a price of USD 600 per ounce and holding in 2006 (?)

There was a nice little spike about that time with prices going from USD 450 to 700 before dropping back to 600 and continuing up since then. I distinctly remember one of the wits commenting at around the 560 or 570 mark “Quick, buy now before the crash!” He was wrong of course. But that still doesn’t change the fact that big producer’s are doing very nicely at 800 per ounce.

It’s just a matter of how much of a premium one is prepared to pay for a bit of insurance, plus deciding just how much insurance one wants (and can afford given the price.) And given the risks … Because if this stuff does zip up to USD 2,000 or even way higher as some of the real bullion believers seem to feel it could (and even should?), then the downside risks of that are rather frightening for anyone who inclines to the view that while History may not repeat itself, it certainly does sometimes rhyme.

In that regard, if I was seriously interested in gold, I’d be inclined to spend a bit of time having a very close look at the various up and downs of gold in between 1971 and the mid 1980s re what was happening in America re debt, inflation etc and what was going on the Middle East that was affecting oil prices/crises, any major stock market ups and downs around then plus also doing a bit of research on any major production technology breakthroughs the industry came up with over that time and since.

But then as an Australian, one would probably be wanting to do their thinking in terms of AUD rather than USD because the exchange rate has certainly changed a lot over that period as well.

But I’ll leave it all well alone. Too much effort for mine. For a commodity I don’t have a really serious interest in?

Now over the longer term I guess gold will appreciate in value, but so will a tonne of wheat I dare say so I am not sure why the gold bulls feel the only long term value storing asset is gold. If I thought the world was about to fall in a heap I would prefer to have a silo full of wheat rather than some gold bars in my fallout shelter (oh and of course I would want a home as well!)

Of course gold could go up much further if the global financial crisis takes a nasty turn or if people keep moving funds into gold. But at some point (and I have no idea when) I feel the price will correct downwards.

But as a bullion buggish type chap I follow once commented re Silver “A darn good way to get your heart torn out.” (If I recall correctly and I think I do.) Not that he was saying don’t buy silver; Just commenting on the risks. Wherewith go the the returns I suspect.
Cheers!

No answer at all from this corner sorry -- But some comments: I incline to the view that there is no gold shortage as such. (For lots of reasons.) But either way, at USD 800 per ounce “everyone” wants to be a gold producer -- As in you don’t have to be especially efficient or smart or even sitting on an especially great ore body to make money at those prices. (Hey at USD 250 an ounce in 1999 it was tough but still just doable for good operations. Although at USD 500 per ounce it is a bit of a cakewalk I suspect?)

But I also accept that people love bubbles. And also have to admit to a personal bias -- Namely, having worked fulltime in the industry for a decade or so (with a casual association dating back about 5 years before that), it could be a case of familiarity breeds contempt in my case?

But put simply, I’d rather own a real basic house than 8 kg of gold -- PS: Gold is pretty heavy -- 8 kg isn’t much -- Your laptop weighs maybe 2.8 kg? And lots of it is air and plastic, Yes? 8 kg works out to be maybe 425 ml -- Less than half a litre of milk in volume.) A house or half a litre of gold??? -- I’ll take the house thanks. And hit the local creeks with the rest of the Zimbaweans to pan for gold on the chance we should hyperinflate.

But irrespective of what one places value on, what I do know looking at all those graphs, is that while the wild ride up from 1971 to 1980 might have been good fun (especially for those who had the nerve to hold during the downward blip in the mid 1970s), the gut wrenching drop from between 1980 and 1982 followed by close on another 2 decades of grinding downward attrition would have been a very unhappy thing to be caught on the wrong side of. Certainly not to my taste anyway.

Having said that, I own enough gold to pay the local government charges on my home for three years -- “Just in case” as they say.

And 22 and 24 carat gold jewlery IS exceptionally pretty -- In my opinion at least. And given it’s volatility, gold can be lots of fun to trade -- I sort of think of it as a big night out at the casino that can be stretched out over many months with a bit of luck and fortitude. (Often regretted the next morning regardless; But jolly good fun at the time.)

Cheers to all!

Some further comments on the off chance they may be of use to anyone:

A lot of capital is invested in setting up a large scale modern gold producing operation. These big boys are working large ore bodies. They planned to be around for a while when they initially set up shop. And the longer they can make it, the better they like it – Because a lot of the money went in up front as infrastructure costs -- They want to milk every last possible cent out of that investment. (As would I -- Smile!)

They can and do review their life of mine projections based on their best posible gold price guestimates and their production cost projections. (The gold producers of the world are not an old style De Beers diamond cartel. They don’t control the price of gold. But they will take whatever the market is prepared to pay them for it and say Thank you.)

They can hedge their bets a bit by forward selling. But that practice has gotten considerably less popular than it used to when gold prices were lower is my understanding – Although I guess at current prices some of them might be considering/could have been doing, a hit of hedging by forward selling more recently; Based on all sorts of factors – General ones, plus ones that are more specific to their particular operation, including their Life of Mine projection perhaps?

But they can and do respond to changes in gold prices. They typically can’t “spin on a top” of course. But they surely can respond. Aggressively if necessary. And certainly more quickly than some people might think perhaps?

As for the small marginal producers – Well they simply go broke and close up shop if prices drop. But that probably won’t affect the price of gold very much (if at all?) because:

a) They were never producing much anyway, and

b) In a tough environment where gold prices are down (as well as cutting the costs they do control – there is always a buck to be saved somewhere if one is motivated enough to look for it), the big boys will be doing things like ramping up on their tons mined and mill throughput volumes to get the most possible ounces popping up at the end of each gold pour to compensate for any fall in their profit margin per ounce that has been caused by rises in their costs, and

c) And they have an edge on many miners in that regard I suspect? While I’d suspect there are some differences in the value of some barrels of oil over other barrels of oil, and some tons of iron ore over other tonnes of iron ore, and some tons of coking coal over other tones of coking coal (re quality/grade?), big gold miners are typically sitting on an ore body that contains High, Medium and Low grade ore. (The cutoffs between those grades are very different from operation to operation of course -- Based on things like sulpur content, whether you need autoclaves to burn off the sulphur, how geographically isolated you are [that affects costs], how much “persuasion” money you have to pay out to operate, what environmental and other legislative restrictions you are operating under, are you pulling ore from underground or open pit or both etc, etc, etc.) But irrespective, they have patches of really profitable dirt mixed in with all the other bits. And if they are any good, they have a bit of an idea from their drilling, just what is where and how easy (or difficult) the really good bits might be to get at. So they can hit them if they especially need to just maybe. They probably won’t enjoy doing it – Because if messes up their mining plan and costs them money long term. But if it a matter of Hey, we need to do this to stay in the game -- the answer is going to be Then so be it! Because, ultimately, if worst comes to worst, and they do have to close up shop, they will at least walk out knowing that they got the very best stuff.

Interesting Blog topic Greg -- I’ll try to write a bit more on it from a more macro/longer term perspective another day.

Cheers!

You can find some good information on the demand for Silver here: http://news.silverseek.com/SilverSeek/1170992765.php

I think the the curious thing with the graph is they highlight that gold is below the 1980 prices but my response would be ..so? The current gold price is also above the 2000 price, so exactly what is their point? Actually if you look at the prices from 1900 then gold looks expensive now? isn’t it true that if gold can jump up to reflect fear then surely it can also just as easily fall when fear subsides?

Same deal, just way back to 1900.

It makes $600 an ounce not look so bad…although the market has dramatically changed since 1900.

It’d be an interesting fall from grace if gold plummeted and never recovered. I feel somewhat irrationally bullish towards it -- probably a bit like the real-estate bulls at the moment. I’ve been looking at some trends and assuming they will occur again.

I think it really depends on the Government intervention(s) now -- they are the deciding factor that will affect consumer confidence in fiat money in the future. They actions they have taken so far are awful (eg money printing).

However I do wonder what the effect of a Global fiat currency would be on the price of gold. Would people see no need for gold anymore and ditch it? Or would they become even more scared? I think gold would drop personally.

If the Euro is anything to go by, a global fiat currency backed by nothing but an institution and laws would probably fail pretty badly. It only takes one country to be deliberately relaxed on counterfeiting and the whole system is skewed. Also people might get upset with trade and hoarding, etc. Eg, if China saves a trillion ‘new’ dollars…it can just keep it and not worry about the USD inflating it away.

But…as has been said by many before -- gov’s won’t easily give up their ability to manipulate their own currency. It is seen as a powerful economic and political tool, regardless of the negative implications.

Okay, tangent over…

Then the question is, what do you trade your gold in for if you think it’s a bubble? I mean, can you trust fiat currency?
It gets messy real quick, but that is something to worry about if we get to that stage. Speculating on that now will only serve to confuse.

I guess it is easy to see why there are so many gold bulls out there!

Greg: One thing that convinces me that prices are not ‘high’ now is the 80′s spike. When inflation adjusted, it went much higher than what we have now:
http://i164.photobucket.com/albums/u37/dacrunch/gold_luster.png
(ignore the site I got that chart off…’google images’ again. It’s all over the place)

Human nature tells me people will rush to gold when they realise their cash and assets are so vulnerable. It’d be nice if that didn’t happen though.

I am not what you would call a gold bear, but I do see some problems with prices at levels around $1000 USD an ounce at this point in time.

I wonder how much high gold prices hurt companies that need gold for industrial purposes?