Gyroscopic Investing

It turns out that the price of gold is essentially influenced by inflation expectations and to a lesser degree real interest rates and the marginal costs of production. But even these factors are hard or nigh impossible to predict so that investors have to come up with scenarios about the future development of these factors.

Yeah, that sounds about right to me.

Our life would be so much easier if there was an Inflation Expectations index to track.

MachineGhost wrote: Our life would be so much easier if there was an Inflation Expectations index to track.

+1

Cliff Notes Version

Gold as an inflation hedge and store of value
• Theory: Gold is one of the oldest stores of value in human history and has protected investors against surprise inflation for many thousands of years. Thus, gold is the oldest inflation hedge in the world and should continue to protect against inflation in the future.
• Fan base: Long-term investors seeking protection against inflation, economists, hard money advocates and doomsday prophets.
• Fact or fantasy? Fact (with a capital F)

Gold and real interest rates
• Theory: Gold competes with fixed income investments for investor liquidity. If real interest rates rise or are high, the opportunity costs of gold relative to fixed income investments rises and the demand for gold drops.
• Fan base: Except for a small group of economists surprisingly few people.
• Fact or fantasy? Fact – even though it might be just correlation not causation

Gold as a crisis hedge
• Theory: In times of economic or political crisis investors flee into safe haven assets like gold.
• Fan base: Long-term investors looking for a hedge against political uncertainty, investors who have experienced war and crisis themselves as well as doomsday prophets.
• Fact or fantasy? Fantasy

Gold and the US Dollar
• Theory: A weaker dollar should lead to increased demand for hard currencies like gold.
• Fan base: Hard money advocates
• Fact or fantasy? More fantasy than fact

Gold and production costs
• Theory: Economic theory states that the price of gold should at least be as high as the marginal costs of production of gold. Otherwise production will be curtailed and the resulting supply shortage leads to rising prices.
• Fan base: Economists and gold bears
• Fact or fantasy? Fact, as long as one uses the right argument…and even then it is unreliable.

Gold and central bank demand
• Theory: Central banks are amongst the biggest investors in gold. If they buy or sell gold out of their vaults, this should impact the gold price.
• Fan base: Constantly changing.
• Fact or fantasy? Fantasy

Gold and ETF holdings
• Theory: Investment demand for gold is focused largely on physical gold ETF. If investors demand for gold declines, the resulting reduction in ETF holdings leads to selling pressure in gold markets and should trigger price declines. Alternatively, increased demand by ETF investors should support gold prices.
• Fan base: Pretty much every investment bank in the world and a wide range of investors chasing past returns.
• Fact or fantasy? Fantasy

Gold forecasts by experts
• Theory: Due to their experience and analytic skills analysts of investment banks and asset management firms should be able to forecast gold prices more accurately than the average investor.
• Fan base: Bankers and all their clients gullible enough to believe everything they say
• Fact or fantasy? The equivalent of a unicorn in gold markets.

Conclusion
• It turns out that the only reliable indicators for the price of gold seem to be changes in inflation expectations and real interest rates.
• In the current environment (2014) this means, that gold prices should continue to react strongly to the actions of central banks.
? If the current ultra-expansive monetary policies remain in place inflation pressures continue to rise and inflation expectations may eventually start to rise as well. At the same time real interest rates might remain artificially suppressed for longer leading to further support for the price of gold.
? If on the other hand central banks start to normalize monetary policy and/or manage to keep inflation expectations under control, then gold prices should decline significantly due to low or even falling inflation expectations and rising real interest rates.

I'm surprised that central bank sell/buy does not affect price?

I don't know where this tripe originally came from, but here's the reality:

Gold as an inflation hedge and store of value
• Theory: Gold is one of the oldest stores of value in human history and has protected investors against surprise inflation for many thousands of years. Thus, gold is the oldest inflation hedge in the world and should continue to protect against inflation in the future.
• Fan base: Long-term investors seeking protection against inflation, economists, hard money advocates and doomsday prophets.
• Fact or fantasy? Fact (with a capital F)

Fantasy.  Gold debasement was regular and common.  Post-fixed exchange rates, gold has been a poor relative inflation hedge and a poor relative store of value.

Gold as a crisis hedge
• Theory: In times of economic or political crisis investors flee into safe haven assets like gold.
• Fan base: Long-term investors looking for a hedge against political uncertainty, investors who have experienced war and crisis themselves as well as doomsday prophets.
• Fact or fantasy? Fantasy

Fact, but not always.  It shares the limelight with T-Bonds.

Gold and ETF holdings
• Theory: Investment demand for gold is focused largely on physical gold ETF. If investors demand for gold declines, the resulting reduction in ETF holdings leads to selling pressure in gold markets and should trigger price declines. Alternatively, increased demand by ETF investors should support gold prices.
• Fan base: Pretty much every investment bank in the world and a wide range of investors chasing past returns.
• Fact or fantasy? Fantasy

Fact when the NAV is trading at a premium or discount.

MachineGhost wrote: I don't know where this tripe originally came from, but here's the reality:

Gold as an inflation hedge and store of value
• Theory: Gold is one of the oldest stores of value in human history and has protected investors against surprise inflation for many thousands of years. Thus, gold is the oldest inflation hedge in the world and should continue to protect against inflation in the future.
• Fan base: Long-term investors seeking protection against inflation, economists, hard money advocates and doomsday prophets.
• Fact or fantasy? Fact (with a capital F)

Fantasy.  Gold debasement was regular and common.

Sorry, but there is no such thing as "gold debasement". There is debasement of money due to the dilution of gold with other less valuable metals.

Hope that helps.

Libertarian666 wrote: Sorry, but there is no such thing as "gold debasement". There is debasement of money due to the dilution of gold with other less valuable metals.

I stand corrected!  And thank you for making my point that gold is no longer money.