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Gold Price:

A chart and table showing historic

gold price data.

Gold price

The above gold chart represents the

London Gold Fixing (a.m.) in three

currencies over a five year period.The following table sets out the gold

price versus various investments andkey statistics:

Year to Gold Silver

DowJones

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December US$/oz US$/ozAvera

ge

1910 20.67 0.54 9.05 59.60

1920 20.67 0.54 6.81 71.95

1930 20.67 0.33 15.34 164.58

1940 34.50 0.35 10.58 131.13

1950 40.25 0.80 20.41 235.42

1960 36.50 0.91 58.11 615.89

1970 37.60 1.64 92.15 838.92

1980 641.20 15.65135.7

6963.99

1990 423.80 4.17330.2

22,633.

2000 272.15 4.601,320

.2810,786

.85

2005 513.00 8.831,248

.2910,717

.50

Factors influencingthe gold price

Historically, before 1970, the price of

gold was set by the US Government,so that an ounce of gold represented

a certain fixed number of dollars.Until that time other countries set

their currencies as being convertibleinto dollars at a fixed exchange rate,

and thus the price of gold in thoseforeign currencies was also constant,

until they devalued against the dollar.The dollar was itself occasionallydevalued against gold bygovernment edict. That was known

as the gold standard. Since 1970,the price of gold has been allowed to

float freely.

The usual benchmark for the price of

gold is known as the London Fixing.This is done at a twice-daily meeting

of a committee consisting of fiverepresentatives from bullion-trading

firms. The meeting was chaired fromits inception in 1919 until 2004 by therepresentative from N M Rothschild

& Sons. In May of that year,Rothschild announced its intention towithdraw from the committee, and

was replaced by Barclays Bank, andthe chairmanship is now rotated

annuall . The other four

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firms who have acquired the originalLondon bullion dealers in the

intervening years.

In addition to the gold fix, there isactive gold trading based on intra-day spot price. These are derived

from multiple gold-trading marketsaround the world as they open and

close throughout the day.

Today, like all investments, andcommodities, the price of gold isultimately driven by supply and

demand, including hoarding and dis-hoarding. Unlike most other

commodities, the hoarding and dis-hoarding plays a much bigger role inaffecting the price, since almost all

the gold ever mined still exists and ispotentially able to come on to the

market at the right price. If, forexample, the gold price were$100,000 an ounce, queues would

form outside bullion dealers aspeople tried to sell their wedding

rings. About one fifth of all gold everproduced sits in official gold reserves

at various central banks, to be usedonly in a last resort in case of a

national crisis. Given the huge

quantity of above ground hoardedgold, compared to the annualproduction, the price of gold is mainlyaffected by changes in sentiment,rather than changes in annual

production or gold jewelry demand.

The IMF and central banks play an

important role in the gold price.European central banks, such as the

Bank of England and Swiss National

Bank, have been selling a total ofapproximately 500 tonnes of gold ayear from the late 1990's until 2005

[1]. However, with inflation creepingback into the system, some say thetide may be turning. In November

2005, Russia, Argentina and SouthAfrica expressed interest inincreasing their gold holdings. Other

than Russia, these are not viewed assignificant central banks, but any

move by Japan, China or SouthKorea to do the same would be seen

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75% of its foreign reserves in gold,

whereas China holds approximately1% in gold.

Although central banks do notgenerally announce gold purchases

in advance, some such as Russiahave expressed interest in growing

their gold reserves again as of late2005 [2]. In early 2006, China, who

only holds 1.2% of its reserves ingold, announced that it was looking

for ways to improve the returns on itsofficial reserves. Many bulls took this

as a thinly veiled signal that goldwould play a larger role in China's

reserves, which they hope will pushup the price of gold. It wouldhowever be impossible for China to

increase its gold reserves byanything other than a small

percentage, since there is simplyinsufficient gold available in themarket.

Inflation fears have also beeninfluential in the past. Inflation is

once again rising. The October 2005consumer price index level of 199.2

(1982-84=100) was 4.3 percenthigher than in October 2004. During

the first ten months of 2005, the CPI-

U rose at a 4.9 percent seasonallyadjusted annual rate (SAAR). Thiscompares with an increase of 3.3

percent for all of 2004.

Factors Influencing

the Gold Price

Sentiment

It used to be said that "Gold is the

world's frightened bunny". Whenevercrisis threatened, the demand for

physical gold increased.

Bank failures

When dollars were fully convertibleinto gold, both were regarded as

money. However, most peoplepreferred to carry around the paper

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The Bullion

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SaveMoney

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Investing

Gold Fire SaleAdam Hamilton July 28, 2000 3966 Words

The most important fundamental issue to understand prior to committing capital to an investment is valuatio

Initial valuation is usually what makes a particular investment decision a towering success or a dismal failure

Even risk takes a backseat to valuation. Imagine you learn of a perfectly risk-free investment that pays $10

cash every year. In this mental exercise, imagine there is zero risk of default and no exogenous factors that

can affect the future stream of cashflows spun off by the investment. Is this a good or a bad deal? There is

absolutely NO way of evaluating that question without the initial valuation. If you pay $1 for the $100 annua

cashflow stream, you are a hero and deserve to be in the hallowed investor hall of fame with Graham and

divisible gold coins. If people fearedtheir bank would fail, it may create a

bank run. This is what happened inthe USA during the Great

Depression of the 1930s, leadingPresident Roosevelt to impose a

national emergency and to outlawthe holding of gold by American

citizens.

Inflation

Most paper currencies which everexisted have been inflated out of

existence. Even the very few whichhave survived a hundred years or

more, have seen almost all of theirvalue eroded by the printing of paper

money, or the inflation of the moneysupply. Rising prices, known as

inflation are a symptom of theinflation of the money supply. In

times when inflation is high, or isexpected to be high, because it is

rising, people seek protectionthrough holding real assets rather

than fiat currency, which can beprinted ad infinitum. History is littered

with examples of currencies whichhave collapsed in hyperinflation.

Gold, which is a real asset, cannever be printed by any government,

nor is it a claim against any creditor.The demand for gold rises in

inflationary times, pushing up thegold price.

War, invasion, looting

In times of national crisis, people fear

that their assets may be seized, andthe currency may become worthless.

They see gold as a solid asset whichwill always buy bread or

transportation. Thus in times of greatuncertainty, particularly when war isfeared, the demand for gold rises.

Production

According to the World Gold Council,annual gold production over the last

few years has been close to 2,500tonnes. However, the effects ofofficial gold sales (500 tonnes), scrapsales (850 tonnes), and producer

hedging activities take the annualgold supply to around 3,500 tonnes.

Demand

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Buffet. If you pay $10,000 for the same $100 cashflow stream, you are a goat and will soon be flat broke, o

worse! EVERYTHING else about investing pales in importance in comparison to initial valuation. After all, th

path to investing success is summarized in the all important axiom, Buy LOW and Sell High!

No one, not even the most rabid stock market bulls, will argue that the US equity markets are UNDERvalued

The fact that equity valuations far exceed all historic norms and historic excesses is undisputable, and is astraw man easy to knock down and easy to prove. In historic times following equity overvaluation, the ass

of choice to own has been gold. Are we entering another golden age for the recently much maligned yellow

metal? Is gold overvalued or undervalued at the moment? If it is overvalued, there is no sense in buying it.

If it is undervalued, however, the potential returns on gold as the fractures cascade through the US equity

bubble could be legendary. A vast array of methods exists to analyze gold valuation. In this essay, we will

focus on examining the current gold valuation (around US$280 per ounce) from the perspective of current

general commodity valuations and the current interest rate environment.

Commodities may be defined as a physical substance that is essential and fungible. Fungible simply means

any one unit of a commodity is perfectly interchangeable with any other unit of the same commodity. For

example, a bushel of a certain grade of wheat is functionally identical to another bushel of the same grade ofwheat. An ounce of gold is an ounce of gold no particular ounce is less valuable or more valuable than any

other ounce. As a further qualification, in order to be classified as a commodity the physical substance must

be bought and sold by speculators and hedgers in a commodity or futures exchange. Today certain intangibl

purely financial products, including equity index futures and foreign currencies trade on exchanges and are

called commodities, but they are ethereal and fall short of the classical definition of a commodity.

In both the ancient and modern worlds, it is almost impossible to overstate the importance of commodities.

Every empire in the history of humanity only became an empire because it was able to acquire adequate

amounts of crucial commodities (by purchase, theft, or conquest) and it was able to distribute those

commodities internally to satisfy the perpetual needs of its populace. The great cities of world history could

not have formed without careful management of scarce commodities. One of the greatest empires ever, builby the incredible Romans, offers many compelling examples of just what lengths a state will go to obtain

commodities. Today, many of us tend to make the false assumption that the ancients were primitive. Sure,

they didnt have color TV or microwave ovens, but their amazing accomplishments in finding, producing, and

distributing commodities are almost unequaled to this day. In order to feed the growing population

surrounding the city of Rome, for example, the Romans built a huge fleet of grain freighters that sailed back

and forth between various Roman ports and the breadbasket (at the time) of Egypt. Some historians estima

there were hundreds of dedicated wheat ships, and, amazingly enough, many were comparable in size to larg

commercial freighters today (excluding supertankers). Some of these vessels had crews exceeding 275 men

The fleet sailed whenever weather permitted, only sitting out a few months of winter when the Mediterranean

tended to boil with fierce storms. The Caesars of Rome realized that without wheat to make food, the empire

would rapidly disintegrate. In another spectacular achievement, which some consider on par with thePyramids and Great Wall of China as a wonder of the ancient world, the Romans literally destroyed a mounta

to get gold. In what is now known as the Medulas in the Leon province of northwestern Spain, Roman

engineers pulled off a feat so audacious the results are still easily visible to this day. The Romans found

mountains full of gold, and they needed vast amounts of gold to finance their ever campaigning legions, whic

were continually busy terrorizing the world. In order to recover the gold, the engineers dreamed up an

ingenious plan to replace conventional mining techniques, which were considered too slow. The engineers

began building dams high in a neighboring mountain range to catch melting snow in huge reservoirs. They

or industrial/dental production, andaround 500 tonnes goes to retail

investors and exchange traded goldfunds. For the last few years, the

official sector sales of around 500tonnes have been taken up by retail

investors and gold funds.

Supply and Demand

Some investors consider that supplyand demand factors are less relevant

than with other commodities sincemost of the gold ever mined is still

above ground and available for saleat a price. However, supply and

demand does play a role. Accordingto the World Gold Council, gold

demand rose 29% in the first half of2005. The increase came mainly

from the launch of a gold exchange-traded fund, but also from jewelry.

Gold demand was at an all timerecord. Demand from the electronics

industry is rising by 11% a year, jewelry by 19%, and industrial and

dental by 21%.

Gold - Online

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built mammoth canals, many miles long, from the mountain reservoirs to the mountain containing the gold

ore. In the shadow of the gold filled mountain, on a broad, almost flat valley, they dug a complex network o

canals and catch basins. Finally, the engineers laid out careful plans on how to burrow into the gold bearing

mountain, with slaves performing all the brutal physical labor necessary to build the intricate network of

tunnels. When the project was finished, the primary mining tunnels covered an area of almost 4 square mile

with many complex interlocking vertical levels. The total canal system included over 60 miles of carefullyconstructed waterways. Before the slaves were even out of the mine, the Romans gave the order to seal the

exit shafts. The great dams in the mountains were then burst, and a deluge of water roared through the

canals and into the honeycombed mountain containing the gold. The intense hydraulic pressure literally

shattered the mountain in a matter of minutes, and the whole monolithic chunk of earth and rock disappeare

and washed into the broad valley below full of canals and catch basins. Another group of slaves painstakingl

removed the dirt and rock debris from the catch basins and recovered the valuable gold ore. The Romans

were able to recover an enormous amount of gold with relatively little labor. The spectacle of the mountain

imploding had to be one of the few things in the ancient world that compared in fury to a small thermonuclea

explosion! The empires of antiquity entire existences revolved around commodities.

In modern times, although many believe otherwise, commodities are still vastly more important than intangibfinancial assets. Another thought exercise Visualize any large city of 1 million people. Now take away all

external sources of money and capital for two weeks, what happens? Some businesses will fail as they are

unable to scrounge up sufficient working capital, some people will not be paid, some projects will be delayed

cancelled, but life will go on. Now visualize the same city, but eliminate all external sources of commodities.

With no wheat or food products, the unfortunate residents will be out of food in less than 72 hours, and riots

will begin within days as hungry people demand food. With no oil or petroleum distillates, commerce will soo

grind to a halt and the city will immediately cease to be productive. The same thoughts may be expanded to

encompass entire countries in our modern world. Capital and financial instruments are definitely important,

but they are a distant second in importance to crucial commodities, even in our current high technology glob

economy.

Today, one of the easiest and best proxies to monitor the commodities markets as a whole is the Commoditie

Research Bureau Futures Index (CRB). Created in 1957, the index was designed and calculated to provide a

dynamic perspective on price movement trends in a broad base of important commodities. Although the CRB

originally included 28 commodities, it has been pared down to represent 17 important commodities today.

These include corn, soybeans, wheat, cattle, hogs, gold, silver, copper, cocoa, coffee, sugar, cotton, orange

juice, platinum, crude oil, heating oil, and natural gas. The calculation of the index is quite complex, but the

results are a balanced view of general price levels and trends in the entire commodities market.

Although gold has always been and always will be the undisputable king of commodities, it has a relatively

small influence on the CRB index. Naturally, the correlation between general commodity price levels and the

price of gold has been quite high in the recent past. By analyzing the CRB index and gold, we can begin todetermine whether gold is undervalued or overvalued relative to the broad basket of important commodities.

Here is a chart of the CRB Futures Index and gold since 1960

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The correlation between the CRB and gold has been a stellar 0.91 since 1960. One of the first attributes of

these data series that stands out is the incredibly calm and sedate commodity price levels that existed before

1972. The CRB traded close to 100 from its inception to 1972, as stable commodity prices greatly aided the

booming economy in the United States in the 1960s. On August 15, 1971 President Richard Nixon led the

United States of America to default on its international obligation to redeem dollars for gold. This notorious

date of infamy is represented in the graph above by the vertical black dotted line. As the last vestiges of the

gold standard were severed, prices of everything began to gyrate wildly, in volatility that continues to thisday. Without the discipline imposed on the dollar by gold, the new unbacked fiat dollar is still being created

out of thin air at a relentless pace, resulting in incredible inflation and price volatility since that fateful day. I

the last 40 years, there have only been five major rallies in the CRB, which are numbered in the graph above

The green dots represent the starting point of each rally, and the red dots represent its termination. How did

gold perform during these major CRB rallies? Extraordinarily well!

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The numbers in the left column in the table above correspond with the five major CRB rallies outlined in the

previous graph. Drilling further down into the CRB rallies, we learn that the average major CRB rally boosted

the index by nearly 60%. The rallies lasted an average of 32 months, with only one significantly shorter rally

Interestingly, in these times of rising commodity price levels, gold more than doubled the average gain of the

CRB, weighing in at an impressive average 126% gain. Only once, in the third major CRB rally lasting from

late 1982 to early 1984, did gold decline in value. This is likely attributable to several factors. First, when th

particular CRB rally began, gold was trading at $436 per ounce, above its recent historical average price. Fro1974, just after private gold ownership in the States was once again legalized, until today, the monthly closin

gold price has averaged $337. Second, the CRB rally was shorter and of a smaller magnitude than the other

CRB rallies. Finally, the third rally was a temporary upward jump in a down trending CRB, and did not begin

a long-term CRB bottom. Over all, the data is quite compelling in favor of major CRB rallies being

accompanied by major rallies in the price of gold. Has a new CRB rally (number six) recently begun? What

does it bode for gold?

8/8/2019 Gold Facts

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Observing monthly data since 1995, we can see the CRB appeared to make a major bottom in early 1999. I

the last 18 months, the CRB has risen over 20%. Gold, however, has been uncharacteristically lethargic as t

CRB rockets up. History would suggest the CRB rally has a high probability of lasting until the autumn of 200

(32 months), and approaching a CRB Futures Index level of nearly 300 (+59%). Historical experience also

leads us to believe gold should jump from $287 when the CRB rally began to an incredible $650 per ounce

(+126%) before the CRB turns decisively south again! Even being more conservative, we should at the very

least expect gold to move substantially above its 25 year nominal mean price of $337 per ounce. A modest20% gain in gold from $287 would lead to a price around $350 per ounce. Looking at gold relative to the CR

it appears that gold is substantially UNDERvalued at $280 and ready to make a great leap to the upside. Wit

the CRB arrow now in gold bulls quivers, we will take a brief look at golds current valuation from another

perspective... the current interest rate environment.

Just as every commodity has a price, the price of money is known as interest rates. General market interest

rates are very dependent on current inflation. Today, the widely accepted definition of inflation in Wall Stree

circles is an increase in general price levels. This is not entirely correct, however, as inflation can be more

specifically defined as an increase of the money supply at a faster rate than the rate new goods or services a

produced in an economy. The word inflation is not a reference to inflating prices, but a reference to an

inflating money supply. Money can be saved, taxed away, or spent, and inflation results when relatively too

much money is chasing relatively too few goods. As money becomes less scarce, it takes more of the money

to buy everything, and general price levels increase. Throughout history, the vast majority of inflation has

been caused by reckless growth of the money supply by governmental authorities. This is perhaps best

exemplified in John Laws experiences in France in the 1720s, which were immortalized by Charles Mackay in

his 1841 opus magnum Extraordinary Popular Delusions and the Madness of Crowds. John Law, a British rog

who murdered a rival in a duel and had to flee England for France, managed to convince the French King that

endless prosperity would ensue if only enough paper currency could be printed to supply the needs of the

8/8/2019 Gold Facts

11/26

8/8/2019 Gold Facts

12/26

As expected, the CRB and the prime interest rate have a significant positive correlation. When price levels o

commodities are high, generally inflation is a concern and creditors demand a higher return on their money.

Interest rates rise. Gold has a similar relationship with the prime rate

The correlation between gold and prime holds up quite well until 1995, when it plummets from 0.69 to 0.26.

In general, as is easily observable above, higher interest rates coincide with higher gold prices, as gold is the

ultimate asset to hold during times of money supply inflation. Of particular interest is the recent spike up inthe prime, once again nearing 10%. US equity bulls believe Greenspan and the Fed are done raising interest

rates, but many respected international and foreign economic entities have publicly and forcefully stated

several more rate increases will be necessary to slow down the meteoric US economy to prevent it from

burning up and crashing. Although the Federal Reserve does not directly set the prime rate, prime is largely

determined by the Fed decreed federal funds interest rate. In general, the higher the prime rate, the higher

the inflation in the economy. The higher the inflation rate, the higher the price of gold ascends. Gold

valuations tend to be much higher when the prime rate breaches 10%. The table below outlines gold

valuations relative to the prime rate since 1974. Each month of this timeframe is analyzed, with the prices o

gold in months with a prime rate above or below 10% independently averaged to sketch where gold valuation

hovered in differing interest rate environments.

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From 1974 to 2000, when the prime rate was greater than 10%, gold had an average price of $383. When t

prime rate dropped under 10%, the average gold price declined to $310. As 1974 to 1979 was largely a

permanent devaluation of the dollar versus gold, 1980 to 2000 may be a more representative sample to

interpolate to our current market situation. From 1980 to 2000, when the prime rate exceeded 10%, gold ha

an average value of $421 per ounce. When prime dropped below 10%, gold managed to hold on to $358.

With interest rates marching northward, and gold currently valued at $280, the current gold price looks like a

incredible bargain by historical standards. Even erring on the extreme conservative side, we should expect, an absolute minimum, gold to gain between 18% (1980 to 2000 $358 to $421) to 24% (1974 to 2000

$310 to $383), as the prime rate once again exceeds 10% in the near future. That would conservatively val

gold at $330 to $350. There is also a high probability that gold will once again break the $400 level as intere

rates continue to rise, however, mimicking its behavior of the last 20 years.

Examining current gold valuations from the perspectives of general commodity price levels and the general

interest rate environment has yielded conservative valuation estimates on the ancient yellow metal of $330 t

$650 per ounce, much higher than the current market price of gold. This quick and dirty guerilla technical

analysis on gold valuation, however, leaves out critical bullish fundamentals for the timeless yellow metal tha

are highly likely to push it to stratospheric heights exceeding $1500 per ounce when the gold bull market

commences

The US economy is booming, and five years of unprecedented M3 money supply growth is coming home to

roost, putting tremendous upward pressure on prices. Equity markets are at dizzyingly high levels, the highe

in history. In every era and nation when markets even became close to being valued this dearly, a terrible

bust followed the unsustainable boom. The dollar is paradoxically at lofty levels while the trade deficit

continues to grow, eclipsing records each month. Oil prices are rising as global oil demand is beginning to

exceed the easily available oil supply. Many nations of the world are gearing up for war, including China,

8/8/2019 Gold Facts

14/26

Russia, India, Pakistan, Iran, Iraq, Syria, and Turkey. The Palestinians are threatening to unilaterally declare

state in the middle of the tiny country of Israel, potentially throwing the whole Middle East into war. We are

moving into the historically volatile fall season, where markets traditionally get hammered. (maybe that is

why they call autumn fall) Parts of Asia are recovering from their disastrous 1998 currency crisis, and thes

countries are perpetual strongholds of gold demand. As prosperity increases in the southern Pacific Rim, gol

demand will continue to rise from that region of the world. Each of these incredibly important fundamentaldevelopments is, in and of itself, very bullish for gold. Put together, it is almost impossible to build a case fo

gold NOT to rise dramatically in the near future!

Finally, there is what may be the ultimate bullish fundamental for gold. In order to finance investments in th

raging US equity markets since 1995, many money center banks borrowed mind-boggling amounts of gold

from central banks that they promptly sold to invest the proceeds in the stock market. GATA

(www.gata.org) has estimated that the equivalent of all of the gold to be produced in the world for many

years to come will be required JUST to pay back the gold loans to various central banks around the world.

Without pause since 1995, gold loans have continued to rise. A day draws near, however, when more gold w

be purchased to pay back the central banks than will be borrowed, creating a potential once in a lifetime meg

rally in gold. Tens of billions of dollars will be dumped into the physical gold market, which is extremely thinThe price of gold will have to rise to incredible levels to reach new equilibrium prices. As an alternate scenar

some inherently unpredictable exogenous event may spook the gold shorts, causing some of them to rush to

buy to cover their gold liabilities. As this initial buying spree launches the price of gold vertically, many othe

entities short gold will become concerned and begin buying physical gold to close out their own short position

and a sharp, fast, vicious circle to the upside will be sparked. The net effect when the dust clears will be the

biggest short covering rally in the history of the world, and gold bulls will reap a harvest that will make 5 yea

of NASDAQ capital gains look like chump change.

Many factors affect the price of gold, and they are almost unanimously bullish. The probability increases dail

that these individual technical and fundamental positives will accrue into a massive rogue wave, catapulting

gold to incredible levels. Currently and briefly flirting with 20 year lows, the markets have been generousenough to put on a fire sale in gold. For what will ultimately be pennies on the dollar, today one can acquire

gold no one else wants at an unbelievable bargain. With all the turbulence and excitement coming down the

financial and geopolitical turnpikes, however, this fire sale will not last for long!

Adam Hamilton, CPA July 28, 2000

http://www.gata.org/http://www.gata.org/

8/8/2019 Gold Facts

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Gold Fire SaleAdam Hamilton July 28, 2000 3966 Words

The most important fundamental issue to understand prior to committing capital to an investment is valuatio

Initial valuation is usually what makes a particular investment decision a towering success or a dismal failure

Even risk takes a backseat to valuation. Imagine you learn of a perfectly risk-free investment that pays $10

cash every year. In this mental exercise, imagine there is zero risk of default and no exogenous factors that

can affect the future stream of cashflows spun off by the investment. Is this a good or a bad deal? There is

absolutely NO way of evaluating that question without the initial valuation. If you pay $1 for the $100 annua

cashflow stream, you are a hero and deserve to be in the hallowed investor hall of fame with Graham and

Buffet. If you pay $10,000 for the same $100 cashflow stream, you are a goat and will soon be flat broke, o

worse! EVERYTHING else about investing pales in importance in comparison to initial valuation. After all, th

path to investing success is summarized in the all important axiom, Buy LOW and Sell High!

No one, not even the most rabid stock market bulls, will argue that the US equity markets are UNDERvalued

The fact that equity valuations far exceed all historic norms and historic excesses is undisputable, and is a

straw man easy to knock down and easy to prove. In historic times following equity overvaluation, the ass

of choice to own has been gold. Are we entering another golden age for the recently much maligned yellow

metal? Is gold overvalued or undervalued at the moment? If it is overvalued, there is no sense in buying it.

If it is undervalued, however, the potential returns on gold as the fractures cascade through the US equity

bubble could be legendary. A vast array of methods exists to analyze gold valuation. In this essay, we will

focus on examining the current gold valuation (around US$280 per ounce) from the perspective of current

general commodity valuations and the current interest rate environment.

Commodities may be defined as a physical substance that is essential and fungible. Fungible simply means

any one unit of a commodity is perfectly interchangeable with any other unit of the same commodity. For

example, a bushel of a certain grade of wheat is functionally identical to another bushel of the same grade of

wheat. An ounce of gold is an ounce of gold no particular ounce is less valuable or more valuable than any

other ounce. As a further qualification, in order to be classified as a commodity the physical substance must

be bought and sold by speculators and hedgers in a commodity or futures exchange. Today certain intangibl

purely financial products, including equity index futures and foreign currencies trade on exchanges and are

called commodities, but they are ethereal and fall short of the classical definition of a commodity.

In both the ancient and modern worlds, it is almost impossible to overstate the importance of commodities.

Every empire in the history of humanity only became an empire because it was able to acquire adequate

amounts of crucial commodities (by purchase, theft, or conquest) and it was able to distribute those

commodities internally to satisfy the perpetual needs of its populace. The great cities of world history could

not have formed without careful management of scarce commodities. One of the greatest empires ever, buil

by the incredible Romans, offers many compelling examples of just what lengths a state will go to obtain

commodities. Today, many of us tend to make the false assumption that the ancients were primitive. Sure,

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they didnt have color TV or microwave ovens, but their amazing accomplishments in finding, producing, and

distributing commodities are almost unequaled to this day. In order to feed the growing population

surrounding the city of Rome, for example, the Romans built a huge fleet of grain freighters that sailed back

and forth between various Roman ports and the breadbasket (at the time) of Egypt. Some historians estima

there were hundreds of dedicated wheat ships, and, amazingly enough, many were comparable in size to larg

commercial freighters today (excluding supertankers). Some of these vessels had crews exceeding 275 menThe fleet sailed whenever weather permitted, only sitting out a few months of winter when the Mediterranean

tended to boil with fierce storms. The Caesars of Rome realized that without wheat to make food, the empir

would rapidly disintegrate. In another spectacular achievement, which some consider on par with the

Pyramids and Great Wall of China as a wonder of the ancient world, the Romans literally destroyed a mounta

to get gold. In what is now known as the Medulas in the Leon province of northwestern Spain, Roman

engineers pulled off a feat so audacious the results are still easily visible to this day. The Romans found

mountains full of gold, and they needed vast amounts of gold to finance their ever campaigning legions, whic

were continually busy terrorizing the world. In order to recover the gold, the engineers dreamed up an

ingenious plan to replace conventional mining techniques, which were considered too slow. The engineers

began building dams high in a neighboring mountain range to catch melting snow in huge reservoirs. They

built mammoth canals, many miles long, from the mountain reservoirs to the mountain containing the goldore. In the shadow of the gold filled mountain, on a broad, almost flat valley, they dug a complex network o

canals and catch basins. Finally, the engineers laid out careful plans on how to burrow into the gold bearing

mountain, with slaves performing all the brutal physical labor necessary to build the intricate network of

tunnels. When the project was finished, the primary mining tunnels covered an area of almost 4 square mile

with many complex interlocking vertical levels. The total canal system included over 60 miles of carefully

constructed waterways. Before the slaves were even out of the mine, the Romans gave the order to seal the

exit shafts. The great dams in the mountains were then burst, and a deluge of water roared through the

canals and into the honeycombed mountain containing the gold. The intense hydraulic pressure literally

shattered the mountain in a matter of minutes, and the whole monolithic chunk of earth and rock disappeare

and washed into the broad valley below full of canals and catch basins. Another group of slaves painstakingl

removed the dirt and rock debris from the catch basins and recovered the valuable gold ore. The Romanswere able to recover an enormous amount of gold with relatively little labor. The spectacle of the mountain

imploding had to be one of the few things in the ancient world that compared in fury to a small thermonuclea

explosion! The empires of antiquity entire existences revolved around commodities.

In modern times, although many believe otherwise, commodities are still vastly more important than intangib

financial assets. Another thought exercise Visualize any large city of 1 million people. Now take away all

external sources of money and capital for two weeks, what happens? Some businesses will fail as they are

unable to scrounge up sufficient working capital, some people will not be paid, some projects will be delayed

cancelled, but life will go on. Now visualize the same city, but eliminate all external sources of commodities.

With no wheat or food products, the unfortunate residents will be out of food in less than 72 hours, and riots

will begin within days as hungry people demand food. With no oil or petroleum distillates, commerce will soogrind to a halt and the city will immediately cease to be productive. The same thoughts may be expanded to

encompass entire countries in our modern world. Capital and financial instruments are definitely important,

but they are a distant second in importance to crucial commodities, even in our current high technology glob

economy.

Today, one of the easiest and best proxies to monitor the commodities markets as a whole is the Commoditie

Research Bureau Futures Index (CRB). Created in 1957, the index was designed and calculated to provide a

8/8/2019 Gold Facts

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dynamic perspective on price movement trends in a broad base of important commodities. Although the CRB

originally included 28 commodities, it has been pared down to represent 17 important commodities today.

These include corn, soybeans, wheat, cattle, hogs, gold, silver, copper, cocoa, coffee, sugar, cotton, orange

juice, platinum, crude oil, heating oil, and natural gas. The calculation of the index is quite complex, but the

results are a balanced view of general price levels and trends in the entire commodities market.

Although gold has always been and always will be the undisputable king of commodities, it has a relatively

small influence on the CRB index. Naturally, the correlation between general commodity price levels and the

price of gold has been quite high in the recent past. By analyzing the CRB index and gold, we can begin to

determine whether gold is undervalued or overvalued relative to the broad basket of important commodities.

Here is a chart of the CRB Futures Index and gold since 1960

The correlation between the CRB and gold has been a stellar 0.91 since 1960. One of the first attributes of

these data series that stands out is the incredibly calm and sedate commodity price levels that existed before

1972. The CRB traded close to 100 from its inception to 1972, as stable commodity prices greatly aided the

booming economy in the United States in the 1960s. On August 15, 1971 President Richard Nixon led the

United States of America to default on its international obligation to redeem dollars for gold. This notorious

date of infamy is represented in the graph above by the vertical black dotted line. As the last vestiges of the

gold standard were severed, prices of everything began to gyrate wildly, in volatility that continues to this

day. Without the discipline imposed on the dollar by gold, the new unbacked fiat dollar is still being created

out of thin air at a relentless pace, resulting in incredible inflation and price volatility since that fateful day. I

the last 40 years, there have only been five major rallies in the CRB, which are numbered in the graph above

The green dots represent the starting point of each rally, and the red dots represent its termination. How did

gold perform during these major CRB rallies? Extraordinarily well!

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The numbers in the left column in the table above correspond with the five major CRB rallies outlined in the

previous graph. Drilling further down into the CRB rallies, we learn that the average major CRB rally boosted

the index by nearly 60%. The rallies lasted an average of 32 months, with only one significantly shorter rally

Interestingly, in these times of rising commodity price levels, gold more than doubled the average gain of the

CRB, weighing in at an impressive average 126% gain. Only once, in the third major CRB rally lasting from

late 1982 to early 1984, did gold decline in value. This is likely attributable to several factors. First, when th

particular CRB rally began, gold was trading at $436 per ounce, above its recent historical average price. Fro1974, just after private gold ownership in the States was once again legalized, until today, the monthly closin

gold price has averaged $337. Second, the CRB rally was shorter and of a smaller magnitude than the other

CRB rallies. Finally, the third rally was a temporary upward jump in a down trending CRB, and did not begin

a long-term CRB bottom. Over all, the data is quite compelling in favor of major CRB rallies being

accompanied by major rallies in the price of gold. Has a new CRB rally (number six) recently begun? What

does it bode for gold?

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Observing monthly data since 1995, we can see the CRB appeared to make a major bottom in early 1999. I

the last 18 months, the CRB has risen over 20%. Gold, however, has been uncharacteristically lethargic as t

CRB rockets up. History would suggest the CRB rally has a high probability of lasting until the autumn of 200

(32 months), and approaching a CRB Futures Index level of nearly 300 (+59%). Historical experience also

leads us to believe gold should jump from $287 when the CRB rally began to an incredible $650 per ounce

(+126%) before the CRB turns decisively south again! Even being more conservative, we should at the very

least expect gold to move substantially above its 25 year nominal mean price of $337 per ounce. A modest20% gain in gold from $287 would lead to a price around $350 per ounce. Looking at gold relative to the CR

it appears that gold is substantially UNDERvalued at $280 and ready to make a great leap to the upside. Wit

the CRB arrow now in gold bulls quivers, we will take a brief look at golds current valuation from another

perspective... the current interest rate environment.

Just as every commodity has a price, the price of money is known as interest rates. General market interest

rates are very dependent on current inflation. Today, the widely accepted definition of inflation in Wall Stree

circles is an increase in general price levels. This is not entirely correct, however, as inflation can be more

specifically defined as an increase of the money supply at a faster rate than the rate new goods or services a

produced in an economy. The word inflation is not a reference to inflating prices, but a reference to an

inflating money supply. Money can be saved, taxed away, or spent, and inflation results when relatively too

much money is chasing relatively too few goods. As money becomes less scarce, it takes more of the money

to buy everything, and general price levels increase. Throughout history, the vast majority of inflation has

been caused by reckless growth of the money supply by governmental authorities. This is perhaps best

exemplified in John Laws experiences in France in the 1720s, which were immortalized by Charles Mackay in

his 1841 opus magnum Extraordinary Popular Delusions and the Madness of Crowds. John Law, a British rog

who murdered a rival in a duel and had to flee England for France, managed to convince the French King that

endless prosperity would ensue if only enough paper currency could be printed to supply the needs of the

8/8/2019 Gold Facts

20/26

French economy. When business was booming, the French government was to provide more of this inherent

worthless fiat (backed by nothing, just paper) currency, and when business slowed, the government was to

buy back the fiat currency. What had seemed like a good idea at the time ended up almost destroying Franc

With more money chasing relatively fewer goods and services, uncontrollable price inflation raged in France.

Gold rocketed up in value, signing the ultimate veto on the worthless French scrip. In a vain attempt to fight

gold, the King of France outlawed private gold ownership and attempted to fix the gold price. Gold has wonevery battle against fiat in history, however, and soon broke free of the French governments shackles to rea

astounding valuations. Many would say France has never recovered from this episode in history, as its curre

financial and commodity markets are much smaller and much less important than European neighbors Englan

and Germany. The consequences of unrestrained currency growth can be dire indeed for a nation

Interest rates and gold have long had a strong positive correlation. During times of high inflation, interest

rates climb as creditors demand enough of a return to offset their annual loss from inflation. If inflation is at

10%, for instance, and general interest rates are at 12%, the real rate of return for the creditor is only 2%

annually. 10% inflation means a dollar spent a year from today is worth only 90% of a dollar spent today.

Inflation can be very insidious in eroding investor wealth, as most people saving and investing do not realize

they are losing their purchasing power through inflation until it is too late. Although inflation is not the onlyvariable affecting interest rate levels, it is certainly one of the most important. Gold tends to shine its

brightest in times of inflation. There are a myriad of interest rates we could analyze in relation to gold

valuations, but we will use the prime rate in this essay. The prime interest rate is the lending rate which ban

charge their most credit-worthy customers. Many important consumer interest rates are pegged off the prim

interest rate as well, including mortgages, automobile loans, and credit card debt. Before we jump into gold

valuation relative to the prime rate, here is a quick graphical look at CRB futures and the prime rate since 19

for reference

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As expected, the CRB and the prime interest rate have a significant positive correlation. When price levels o

commodities are high, generally inflation is a concern and creditors demand a higher return on their money.

Interest rates rise. Gold has a similar relationship with the prime rate

The correlation between gold and prime holds up quite well until 1995, when it plummets from 0.69 to 0.26.

In general, as is easily observable above, higher interest rates coincide with higher gold prices, as gold is the

ultimate asset to hold during times of money supply inflation. Of particular interest is the recent spike up inthe prime, once again nearing 10%. US equity bulls believe Greenspan and the Fed are done raising interest

rates, but many respected international and foreign economic entities have publicly and forcefully stated

several more rate increases will be necessary to slow down the meteoric US economy to prevent it from

burning up and crashing. Although the Federal Reserve does not directly set the prime rate, prime is largely

determined by the Fed decreed federal funds interest rate. In general, the higher the prime rate, the higher

the inflation in the economy. The higher the inflation rate, the higher the price of gold ascends. Gold

valuations tend to be much higher when the prime rate breaches 10%. The table below outlines gold

valuations relative to the prime rate since 1974. Each month of this timeframe is analyzed, with the prices o

gold in months with a prime rate above or below 10% independently averaged to sketch where gold valuation

hovered in differing interest rate environments.

8/8/2019 Gold Facts

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From 1974 to 2000, when the prime rate was greater than 10%, gold had an average price of $383. When t

prime rate dropped under 10%, the average gold price declined to $310. As 1974 to 1979 was largely a

permanent devaluation of the dollar versus gold, 1980 to 2000 may be a more representative sample to

interpolate to our current market situation. From 1980 to 2000, when the prime rate exceeded 10%, gold ha

an average value of $421 per ounce. When prime dropped below 10%, gold managed to hold on to $358.

With interest rates marching northward, and gold currently valued at $280, the current gold price looks like a

incredible bargain by historical standards. Even erring on the extreme conservative side, we should expect, an absolute minimum, gold to gain between 18% (1980 to 2000 $358 to $421) to 24% (1974 to 2000

$310 to $383), as the prime rate once again exceeds 10% in the near future. That would conservatively val

gold at $330 to $350. There is also a high probability that gold will once again break the $400 level as intere

rates continue to rise, however, mimicking its behavior of the last 20 years.

Examining current gold valuations from the perspectives of general commodity price levels and the general

interest rate environment has yielded conservative valuation estimates on the ancient yellow metal of $330 t

$650 per ounce, much higher than the current market price of gold. This quick and dirty guerilla technical

analysis on gold valuation, however, leaves out critical bullish fundamentals for the timeless yellow metal tha

are highly likely to push it to stratospheric heights exceeding $1500 per ounce when the gold bull market

commences

The US economy is booming, and five years of unprecedented M3 money supply growth is coming home to

roost, putting tremendous upward pressure on prices. Equity markets are at dizzyingly high levels, the highe

in history. In every era and nation when markets even became close to being valued this dearly, a terrible

bust followed the unsustainable boom. The dollar is paradoxically at lofty levels while the trade deficit

continues to grow, eclipsing records each month. Oil prices are rising as global oil demand is beginning to

exceed the easily available oil supply. Many nations of the world are gearing up for war, including China,

8/8/2019 Gold Facts

23/26

Russia, India, Pakistan, Iran, Iraq, Syria, and Turkey. The Palestinians are threatening to unilaterally declare

state in the middle of the tiny country of Israel, potentially throwing the whole Middle East into war. We are

moving into the historically volatile fall season, where markets traditionally get hammered. (maybe that is

why they call autumn fall) Parts of Asia are recovering from their disastrous 1998 currency crisis, and thes

countries are perpetual strongholds of gold demand. As prosperity increases in the southern Pacific Rim, gol

demand will continue to rise from that region of the world. Each of these incredibly important fundamentaldevelopments is, in and of itself, very bullish for gold. Put together, it is almost impossible to build a case fo

gold NOT to rise dramatically in the near future!

Finally, there is what may be the ultimate bullish fundamental for gold. In order to finance investments in th

raging US equity markets since 1995, many money center banks borrowed mind-boggling amounts of gold

from central banks that they promptly sold to invest the proceeds in the stock market. GATA

(www.gata.org) has estimated that the equivalent of all of the gold to be produced in the world for many

years to come will be required JUST to pay back the gold loans to various central banks around the world.

Without pause since 1995, gold loans have continued to rise. A day draws near, however, when more gold w

be purchased to pay back the central banks than will be borrowed, creating a potential once in a lifetime meg

rally in gold. Tens of billions of dollars will be dumped into the physical gold market, which is extremely thinThe price of gold will have to rise to incredible levels to reach new equilibrium prices. As an alternate scenar

some inherently unpredictable exogenous event may spook the gold shorts, causing some of them to rush to

buy to cover their gold liabilities. As this initial buying spree launches the price of gold vertically, many othe

entities short gold will become concerned and begin buying physical gold to close out their own short position

and a sharp, fast, vicious circle to the upside will be sparked. The net effect when the dust clears will be the

biggest short covering rally in the history of the world, and gold bulls will reap a harvest that will make 5 yea

of NASDAQ capital gains look like chump change.

Many factors affect the price of gold, and they are almost unanimously bullish. The probability increases dail

that these individual technical and fundamental positives will accrue into a massive rogue wave, catapulting

gold to incredible levels. Currently and briefly flirting with 20 year lows, the markets have been generousenough to put on a fire sale in gold. For what will ultimately be pennies on the dollar, today one can acquire

gold no one else wants at an unbelievable bargain. With all the turbulence and excitement coming down the

financial and geopolitical turnpikes, however, this fire sale will not last for long!

Adam Hamilton, CPA July 28, 2000

http://www.gata.org/http://www.gata.org/

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Sobha Mayflower: From 2800 to 2200, any takers?

Readings: GDP growth, The Power of Fear, Know yourself

Sensex & Nifty vs. Gold

DateSensex-

30

Nifty-

50

Gold (Rs, per 10

gms)

December 31, 2002 3,377 1,092 5,580

December 31, 2003 5,839 1,880 6,175

December 31, 2004 6,602 2,080 7,000

December 31, 2005 9,398 2,836 8,100

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a stock, option, future, bond, commodity, index or anyother financial instrument at any time. While hebelieves his statements to be true, they always dependon the reliability of his own credible sources. Theauthor recommends that you consult with a qualified

investment advisor, one licensed by appropriateregulatory agencies in your legal jurisdiction, beforemaking any investment decisions, and that youconfirm the facts on your own before makingimportant investment commitments.

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