Gold has been making new highs yet again, with the price in US dollars nudging USD$1250 last week.
But what about the price in Australian dollars?
This is the question gold bullion investors in Australia should ask. As this is the price-level they would be trading. To calculate the Aussie gold price, you just take the US price (for instance USD$1,221) and divide it by the exchange rate (around 0.86 US dollars).
This gets you the Australian dollar price of AUD$1,420.
Well, the Australian gold price has had a stellar run in the last two months. It came within 2% of a new high. This was because the US gold price has been doing well and because the Aussie dollar has fallen. This has led to a 16% jump in just two months to its recent price of AUD$1,420 per ounce.
Gold has been a great performer, yet I still think its best days are ahead of it. That said, I remember years ago after learning so much about the metal, I was pretty disappointed when I first saw an ounce of gold.
It’s tiny!
Just one centimetre squared, and half a centimetre deep. But it’s amazing how heavy it is, considering its tiny dimensions. Maybe I’ve watched Goldfinger too many times, but I secretly crave a giant stack of gold bars in an underground vault.
But this dream is further away from reality than ever.
Even a medium-sized bar the size of an IPhone, which weighs one kilo, will remain the stuff of fantasy as it’s priced at nearly AUD$50,000.
Imagine that! The price of eleven IPhone sized lumps of shiny metal being the same as the median Melbourne house price. You can understand why gold worked so well as a currency for thousands of years – it represents truly portable and durable wealth.
But of course, now that gold has set a new high, all the naysayers will dominate the media saying that gold’s bull-run is unsustainable.
This will be until it hits its next new high of course.
So how high could it go from here?
It’s not hard to find bullish forecasts. The basic premise for rising gold is that the average year-6 student could do a better job of managing currency than the Federal Reserve and the European Central bank. So people are now going back to what has been used for five thousand years before the paper-money (fiat) experiment started – gold.
On top of this, global gold production has been waning for the last ten years as all the easy gold has already been dug up. Demand for this gold is on the rise, as the average central bank is now a net buyer of the metal. Adding to this demand are hundreds of millions of newly wealthy middle class Chinese who are now allowed to buy gold – with the government positively encouraging them.
For these reasons, precious metals shares and ETFs make up more than half of the Diggers & Drillers portfolio, and I’m trawling for more good opportunities all the time.
The precious metals economist, Jeff Nichols reckons China will be the dominant force in the gold market for the foreseeable future. He said “Significant and substantial growth in gold demand from this region [China] will have a very positive, ultimately overwhelming effect on the dollar price of gold”.
With this in mind he is “…confident in the forecast of US$1500 by the end of 2010, with gold reaching US$2000 or possibly even US$3000 in the next few years”.
In my last newsletter for Diggers & Drillers, I explored a different angle. Rather than forecasting the price, I estimated gold’s true value. Gold is only as valuable as investors think it is. So if gold is gathering recognition as a currency again, it makes sense to determine its intrinsic value as a currency, as per the gold standard.
Whether it ever reaches this price is another matter, but it makes sense that the price would at least trend towards this level over time, as the major currencies of the world get themselves into more and more of shambles.
This is what I reported in the Diggers & Drillers May newsletter:
“I calculated gold’s intrinsic value at a global level by dividing the global public debt (US$38.3 trillion) with the total amount of gold in central banks globally (1.4 billion ounces): The value comes in at a staggering US$27,163/ Ounce.”
I want to make the point that this is not a forecast, but the gold price’s ‘centre of gravity’. The more that gold becomes recognised as a real currency, the more strongly the gold price will be pulled towards this incredible figure.
But even if gold reaches just ten percent of this figure in the next few years – as many are forecasting – there are still some solid gains to be made for gold investors.
Regards,
Dr. Alex Cowie
Editor, Diggers & Drillers
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Not totally relevant to this article but Commsec just sent an article about house prices and I thought this bit may amuse you:
“Latest data shows that housing affordability is not a constraint on either dwelling purchase or construction. The Rismark dwelling price to income ratio stood at just 4.3 in the March quarter, modestly above the five-year average of 4.1. While home prices have lifted by around 42 per cent over the past five years, incomes have broadly kept pace, lifting by 35 per cent. The doomsayers who predict a slump in Australian housing prices in coming years still don’t have a good grip on the fundamentals at work in the market.”
Drew, I have tried saying something intelligible in response to your very good question – see back a few threads.
Regarding the article, two things come to mind:
1. Central banks probably overstate the amount of physical gold they hold. They fudge the figures, of course, by lumping holdings of gold and gold receivables together, but much of the so-called receivables is never going to come back to them, as the leased gold has been long sold, and those they leased it to would go broke if they tried buying the metal back in an attmpt to return it to the central banks. The long and short of it is that these accounts, the gold receivables, that is, are going to be settled in cash and the people can safely say good bye to this part of their gold reserves. And if this is correct, then the calculation is probably very conservative, and the figure should be at least 50% higher.
2. I am not quite sure why this particular way of calculating should be an accurate reflection of what we should regard as the intrinsic value of gold. Why should only central bank gold figure in the calculation, and why only central bank debt? Shouldn’t all the fiat money in the world, whether it is in the form of debt or savings, and all the above ground stock of gold be the better indicators?
I saw Christopher (Marcel Marco) Joye the other day at Perth Mint. Behind him was Glen Stephens.
Thanks cb. Interesting points. Will have a think about it before I get back to you.
lol, MF. So, this what they were hiding!!! You are funny.
Talking of the devil, here is the CHART OF THE WEEK, something to see:
http://www.bmgbullion.com/lib.pl?rm=show_document&record_id=712
If this link does not work by clicking on it, copy it into your browser window and hit return.
the beauty of GOLD is If it does get to USD$27,163….
then it would prob be WW3 & the whole society would BE PPPPHHHHHUUUCCCCCKKKKKKKKKEEEDDDDDDDDDDDDDD
so wat is the real POINT of HOPING GOLD DOES GIT THAT HIGH
YA MAL******A?
etch…it seems you are acquainted with the Greek language!!
Ahh it’s all Greek to me too mate!
hahaa, Nick.
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