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 across.
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
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 to decline.
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 monetary inflation.
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 of debt.
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 money.
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 reserves yet.
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
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.
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