Dr. Murenbeeld's gold price forecast for the coming year
October 14, 2005
I got to hear Dr. Martin Murenbeeld at the Denver
Gold Forum earlier this month, and, as I said last year after attending
his talk, he is hands down the best gold analyst I have ever come
At last year’s Denver Gold Forum, Dr. Murenbeeld
forecasted three possible gold prices: a low price, a most likely
price and a high price. He assigned a probability to each and then
calculated the weighted average gold price as his forecast for the
average gold price in the year ahead. His probability weighted average
gold price forecast last year was $431 an ounce.
Dr. Murenbeeld always starts his presentations by
reviewing his previous forecast to see if reality had the good manners
to obey him, so it was impressive to see that from the date of last
year’s conference to this year’s conference the average
gold price was exactly $431 an ounce.
I’m going to skip to the end of his presentation
and tell you that his probability weighted average gold price forecast
for the next twelve months is $502 an ounce. Now, before you dismiss
this number as too low, here is what it means.
Dr. Murenbeeld always includes three possible prices
with the minimum probability assigned to any price being 10%. For
the next year, an average gold price of $381 an ounce was assigned
a 10% probability, $470 an ounce was assigned a 47% probability,
and an average gold price of $565 an ounce was assigned a 43% probability.
Assigning such a low probability to a decline in the
gold price and such a high probability to a substantially higher
gold price is a very bullish forecast indeed. Keep in mind that
this forecast is for the average gold price over the next twelve
months, so by this time next year the gold price could be substantially
higher than $502 an ounce and Dr. Murenbeeld’s prediction
could still be spot on.
Why is he so bullish?
Devaluation of the US dollar
Trade data suggests that the US dollar is overvalued and uncompetitive.
It shows that international trade is out of equilibrium -- the result
of a distortion of the dollar’s exchange rate. Since markets
always try to reach equilibrium, there is pressure on the dollar
The US trade deficit with China is growing particularly
ugly; it is now over $180 billion annually. In 1993 China devalued
its currency relative to the dollar by about 34%. Dr. Murenbeeld
argues that the renminbi now has to appreciate by at least that
much against the dollar. Given that anti-China sentiment is growing
in Washington with talk of protectionist duties on Chinese imports,
there is no doubt the dollar will fall against the renminbi.
The US also runs a record trade deficit with Europe,
to the tune of $120 billion annually. I am no fan of the euro --
it is the ultimate fiat currency -- but the trade data clearly shows
that the US dollar is overvalued even against the euro.
It follows from the large trade deficits that the
US should also have a current account deficit. At the moment the
current account deficit is a whopping 6% of GDP and a nominal $800
billion. This implies that nearly $4 billion is pushed onto foreign
exchange markets each day. Will the world continue to absorb increasing
amounts of US dollars? Dr. Murenbeeld thinks not.
To date more than 50% of the capital flows required
to finance the current account deficit come from (mostly Asian)
central banks that buy dollars in foreign exchange markets to prevent
the dollar from falling, thereby keeping their own currencies and
economies competitive in the US consumer market.
As interest rates have risen, private capital flows
into the US have picked up, and these are particularly important
in financing the creative real estate mortgage market in the US.
In 1987 the US current account deficit reached almost
3.5% of GDP and caused the dollar to fall by more than 40%. If history
is a guide, the dollar could easily fall another 15% to 25% according
to Dr. Murenbeeld. I think he’s optimistic, and that the dollar
could actually fall much more.
US monetary inflation
It is well understood that a decline in the US dollar will lead
to higher US dollar-gold prices. But we also have to consider US
The US budget deteriorated from a surplus of $255
billion in 2000 to a deficit of $430 billion last year. Larger tax
receipts subsequently reduced the deficit, but Katrina et al. will
most likely absorb any increase in Treasury revenues and push the
deficit further into negative territory.
But that is only part of the story. Total US debt
(government debt, corporate debt and household debt) is now in excess
of 200% of GDP. Last time the US had this much debt relative to
GDP was during the Great Depression and the result was a sharp contraction
During past economic cycles both higher oil prices
and rising short-term interest rates (relative to long-term rates)
played critical roles in pushing the US economy into recession.
Both these factors are now present while household debt is at record
levels, the debt service burden is at a record high level and the
US savings rate is negative.
Demographics now come into play as the first major
wave of baby-boomer retirements is coming up. Dr. Murenbeeld estimates
that the US government’s net financial liabilities (gross
liabilities less assets) could double in the next 25 years, and
that is assuming the budget deficit comes under control.
What is the government likely to do? It has, essentially,
four choices: renege on promises, cut services, raise taxes and
create more money. The first three options shift the financial burden
to households and that means less consumption and slower economic
growth. The last option (creating more money) reduces the real value
of debt. Last year Alan Greenspan suggested that the pressure of
rising budget deficits could force the central bank to create more
Creating more money increases prices, including the
price of gold. Dr. Murenbeeld has a chart showing the correlation
between the gold price and money supply of the G-7 nations. There
is no question in my mind that the gold price in any currency is
primarily a function of the differential inflation rate of that
currency versus the inflation rate of gold.
Increased gold holdings as foreign exchange reserves
According to Dr. Murenbeeld’s figures, Asian foreign exchange
reserves now exceed $2.2 trillion. In total these countries have
1,932 tonnes of gold, representing only about 1.68% of their foreign
exchange reserves at a gold price of $450 an ounce. The Asian central
banks have not publicly shown any willingness to add to their gold
Should they decide to diversify into gold the impact
would be staggering. If only China and Japan adopted the same 15%
of reserve policy of the European Union, then they would need to
buy 17,000 tonnes between the two of them. That is more gold than
the Bank for International Settlements, the IMF and all the signatories
to the Washington agreement own in aggregate, and it would still
amount to only petty cash for Japan and China.
Turning to OPEC nations: In 1970 it took 30 barrels
of oil to buy an ounce of gold, and we know that gold was undervalued
in 1970. Today it takes less than 8 barrels of oil to buy an ounce
of gold. OPEC countries have not publicized any desire for gold,
but when OPEC foreign reserves increased from 1973 to 1981 they
added 270 tonnes of gold to their reserves. If OPEC were to bring
their gold reserves up to 15% of their foreign exchange reserves
they would need to buy more than 1,500 tonnes of gold and, again,
it would be pocket change for them.
Gold is not only inexpensive relative to oil. When
the gold price is compared to the S&P500 we see that there were
three stock market bubbles during the past 100 years. In all three
cases the S&P500 rose dramatically relative to gold and in all
cases the ratio collapsed back to unity again. It is impossible
to predict at what gold price, or what level for the S&P, the
two will be at unity, but history does suggest they could again
reach unity. If the S&P were to stay where it is then the gold
price would have to rise to $6,000 an ounce. That is not very likely,
since the same conditions that would cause the gold price to rise
would probably bring stock prices down, so you can pick your own
favorite number between $500 an ounce and $6,000 an ounce.
Paul van Eeden
Paul van Eeden works primarily to find investments
for his own portfolio and shares his investment ideas with subscribers
to his weekly investment publication. For more information please
visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
Paul van Eeden works primarily to find investments for his
own portfolio and shares his investment ideas with subscribers to his weekly
investment publication. For more information please visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
This letter/article is not intended to meet your specific individual investment
needs and it is not tailored to your personal financial situation. Nothing contained
herein constitutes, is intended, or deemed to be -- either implied or otherwise
-- investment advice. This letter/article reflects the personal views and opinions
of Paul van Eeden and that is all it purports to be. While the information herein
is believed to be accurate and reliable it is not guaranteed or implied to be
so. The information herein may not be complete or correct; it is provided in
good faith but without any legal responsibility or obligation to provide future
updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility,
or assumes any liability, whatsoever, for any direct, indirect or consequential
loss arising from the use of the information in this letter/article. The information
contained herein is subject to change without notice, may become outdated and
will not be updated. Paul van Eeden, entities that he controls, family, friends,
employees, associates, and others may have positions in securities mentioned,
or discussed, in this letter/article. While every attempt is made to avoid conflicts
of interest, such conflicts do arise from time to time. Whenever a conflict
of interest arises, every attempt is made to resolve such conflict in the best
possible interest of all parties, but you should not assume that your interest
would be placed ahead of anyone else’s interest in the event of a conflict
of interest. No part of this letter/article may be reproduced, copied, emailed,
faxed, or distributed (in any form) without the express written permission of
Paul van Eeden. Everything contained herein is subject to international copyright