By Keith Weiner
Fundamental Drivers of Gold Prices
[Ed. note by PT: we believe there is a lot less disagreement with Steve Saville’s approach than Keith assumes – we are adding comments in the chart captions below as well as an addendum and footnotes to illustrate what we mean – all our comments are marked with [PT] below – we have essentially made a discussion out of this week’s supply-demand report, as we believe these issues are of interest to all gold aficionados]
Steve Saville wrote a post this week, in which he proposed a model that indicates the fundamentals of gold. According to him, these are: (1) the real interest rate, (2) the yield curve, (3) credit spreads, (4) the relative strength of the banking sector, (5) the US dollar’s exchange rate, (6) commodity prices, and (7) the bond/dollar ratio.
Steve Saville’s fundamental gold price model (details see here) – this looks actually quite good to us. We follow the macroeconomic indicators it is based on as well – see e.g. “An Overview of Macroeconomic Gold Price Drivers” from mid April. As we understand it, the model is not trying to determine a specific gold price. It merely tries to show in if macroeconomic pressures are pointing toward a rising or falling gold price, and it seems to be doing that quite well. As Steve Saville mentions, the model is slightly leading the gold price (or at least has done so in recent years and on numerous previous occasions – that is not always the case as we have discussed in the past, see also our comment on the yield curve). Keith’s methodology of bringing the trading on gold futures into context with the spot market does the same most of the time (i.e., the fundamental price he derives is usually leading the market gold price). Both models are largely based on market-derived data, so this should be no surprise – we would assume they ultimately show the same forces at work. [PT]
We consider him a friend, and certainly appreciate his view that when gold moves from an ETF to China or India, it has no effect on the price. However, we disagree with his fundamental model. Let’s do a quick rundown of these factors and move on to a broader point.
The Real Interest Rate.
We have addressed this before, saying:
The Nominal Interest Rate means the rate at which lenders lend and borrowers borrow in the market. The Real Interest Rate is the Nominal Interest Rate – inflation. Notice the switcheroo. The actual rate charged by actual lenders to actual borrowers is dismissed as merely nominal. A fictitious rate which is not used in any transactions is elevated to the status of real. Got that?
While we cannot speak for Steve Saville, we are well-acquainted with his views, and we believe he wouldn’t disagree with most of what Keith says here about real interest rates.* We cannot possibly “know” what the real interest rate is, since we can neither precisely quantify the loss of purchasing power …read more
Source:: Acting Man
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