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Understanding Gold Price Movements



April 14, 2013 – Comments (34) | RELATED TICKERS: GLD , DUST , GDX

This is from a close associate and fellow investor and explains very succintly why gold prices have been behaving in an unpredictable pattern in recent months


The are some common misconceptions on gold price formation:

1) The emphasis on mine supply is misplaced; it has very little impact on the gold price.

2) Much has been written in terms of supply and demand quantifying gold flows into market segments, such as industry, jewelry, coins, and funds. There isn't a connection between quantities and price in the way that is commonly understood.

There are two different kinds of commodities, the price formation process is different for each one. 

The first type is a consumption commodity. Ie something the value of which is realized when it is destroyed, eg industrial commodities that once used can not be easily reconstituted, or agricultural commodities that we eat; once consumed it is gone.

Supply and demand matters for price formation with consumption commodities because in any given period, a certain amount is produced and a certain amount is consumed. If there is a shortage, the market place bids up the price, if there is a glut the market discounts the price.

The second type is an asset commodity. An asset is a good that is purchased to be held. Its value is derived from holding onto the item not consuming it. Think about a Van Gogh painting or corporate shares.

Gold is an asset commodity. Pretty much all the gold that has been mined is still in existence. Mine production adds about 1% to the gold stock each year and so supply is relatively inconsequential in comparison to the existing stock.

Many analysts look at gold as if it were a consumption commodity. They look at annual mine supply and industrial fabrication as the determinants of price as if it were barrels of oil.

With consumption commodities, there is a close relationship between the stock and the flow, but with asset commodities, the flow is inconsequential to the stock.

Gold price formation occurs at the margin ie through marginal price theory. The price of gold is set by individuals as they trade off the amount of additional units of gold they want to hold against additional units of other assets or money they want to hold.

On the demand side, the calculus is do I value one ounce of gold more so than my $1500 of cash?

On the supply side, the calculus is do I value $1500 of cash more than my one ounce of gold?

And this was exactly Ed's point. The fear of systemic collapse, rampant inflation following 2008 caused many individuals to value gold more than cash on hand and more so than equities. The sold at the bottom and plunged into gold. At the margin this drove gold price up.

Today the same group have bought into more green shoots, recovery and are now valuing equities (even though they are selling at very high prices now) more so than gold.The same group is selling at the bottom now and plunging into the top in equities. At the margin this is driving the price of gold down.

The big picture is this...

The original thesis for owning gold, ie that of western indebted nation insolvency being forestalled by inflation of the money supply has not changed. In fact it has significantly worsened.

The weak hands holding onto gold are being shaken out. They never understood why they wanted to own gold. 

34 Comments – Post Your Own

#1) On April 14, 2013 at 11:06 PM, awallejr (38.34) wrote:

Well I give you a choice, hold a bunch of paper in your hands or roll a bunch of silver or gold dollars.  Personally I love rolling those silver morgans.

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#2) On April 15, 2013 at 1:00 AM, Valyooo (38.19) wrote:

The main problem I see with investing in silver and gold is the lack of a trustworthy source of news.  As I write this, gold futures are trading at $24.50, more than 50% down from the high less than 2 years ago.  However the silver reporters will say this is just futures manipulation.  Oh really?  Can you sell bullion for $40 ounce?  No.  If future manipulation is driving the price down, it also drive the price up, it can't be both ways.  Are the fundamentals good for gold and silver?  Long term, yes.  But dont forget gold is still up like 650% in the last decade, it's not "at a low" like a lot of people say, relatively speaking it is pretty darn high, it won't go up in a straight line forever, its had 12 up years.  How many assets do you know that have 13 up years in a row?

If silver hits $20 an ounce I will probably start loading up on some SLW. But remember when silver was $4? Remember when silver falls 50% and then the prophecy of silver swtiches careers? 

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#3) On April 15, 2013 at 1:00 AM, Valyooo (38.19) wrote:

As far as the level of indebtedness, fundamentally it should mean terrible things for the economy.....but its kinda the same situation as 1945, except that started a bull market

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#4) On April 15, 2013 at 2:20 PM, valuemoney (< 20) wrote:

Understanding Gold Price Movements

Good luck! What a joke.

Try momentum. Ahh it went up these last ten years and hit 1800. Now it is going down. Were it stops no one knows. Heck it could go back up and break through $2000.

Personally I have had down arrows on gold throughout the last 5 years. And guess what? I will pry end up being right on ALL of them.  

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#5) On April 15, 2013 at 2:52 PM, Valyooo (38.19) wrote:



you claim that it is near impossible to predict the price of then why do you have underperform ratings on them?  That's contradictory 

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#6) On April 15, 2013 at 3:00 PM, valuemoney (< 20) wrote:

Lol.... that is a red thumb on CAPS. In real life I sure the heck ain't shorting....... NO MATTER how right I THINK I am.

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#7) On April 15, 2013 at 3:11 PM, Valyooo (38.19) wrote:

But you said you think you will end up can you think that if gold is impossible to predict?

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#8) On April 15, 2013 at 3:23 PM, valuemoney (< 20) wrote:

See I have a dollar amount I think gold should be worth. I DON'T think I can Understand the gold price movements. There is a BIG difference in the 2. See thats why I am a investor and I stay long the market and don't try to time it. You are the other way around. I know because of our other debates. You think you can time things and make more money. Which if you could and always be right (or right more times than not with your bets) sure. But the times you are wrong you lose money. I put a value on things and if I think they are cheap I buy. If I think they are overpriced, in CAPS I red thumb them. Go read my Ford red thumb pitch I made for F a couple years ago. My red thumb can last 5 years. If I score points on it by the time I end it.  I was right. That is way different from thinking I can time or understand the price movements.

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#9) On April 15, 2013 at 3:29 PM, valuemoney (< 20) wrote:

I think gold is not worth more than $300 and ounce. That is my price I would pay for it. That has NOTHING to do with gold and its price movements now. How could it? Gold is at over $1300 an ounce. That is why I have red thumbs on gold and gold related stuff. And how can someone understand my price? Can you? That is my point.

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#10) On April 15, 2013 at 4:12 PM, Valyooo (38.19) wrote:

Why $300?

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#11) On April 16, 2013 at 10:16 PM, Frankydontfailme (29.38) wrote:

I think AAPl is worth 300, while we're sharing baseless opinions.

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#12) On April 17, 2013 at 12:40 AM, awallejr (38.34) wrote:

Ok, I will play.  I say GOOG at 100.

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#13) On April 17, 2013 at 2:51 PM, valuemoney (< 20) wrote:

That is right. #11 and #12. Baseless opinions on gold. My point EXACTLY. That is what gold means TO ME. So how on earth can you understand the price movements. AAPL and GOOG I can price because they have EARNINGS and a RETURN on investment. NOT just what someone wants to pay for them. If I buy an ounce of gold it just sits there until I find someone to buy it. If I buy GOOG or AAPL I get what AALP or GOOG earns. LOL ........FAR different from the hunk of gold sitting there. Those are MY THOUGHTS. Think what you want. I am just sharing what I think. And they are NOT baseless opinions. I have gave reasoning behind my thoughts on gold. I have many times. Read my GTU pitch on my CAPS page that is another example. I say $300 an ounce is what I would pay for it because it may trade for between 700 and 1200 and ounce and that way I would at least make some money if I sold it.

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#14) On April 17, 2013 at 5:43 PM, awallejr (38.34) wrote:

Value all you are doing is throwing out a silly number.  It costs more to mine gold than your $300.  So I guess you personally will never buy it.  Fine. If you buy GOOG you get a piece of paper.  If you buy gold you get a hunk of metal. At least with AAPL you will get a dividend.

In the end no matter what item we are talking about, its "value" will simply be whatever the highest bidder is willing to pay. And then after that purchase whatever the next highest bidder is willing to pay.

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#15) On April 18, 2013 at 1:27 AM, valuemoney (< 20) wrote:

See this is where we differ greatly I geuss. If I buy a share of GOOG I look at it as I was buying THE WHOLE company. This is how I think one should look at it. Really you are not but it is just scale we are talking about. I am just buying a piece. But humor me and say I bought the whole thing. I get and income from GOOG people pay me for services GOOG provides. In the end I bought a company I DONT want to sell it. I want the EARNINGS it provides me. Gold does nothing for me, it gives nothing back if I buy it and go to sell it. I wouldn't HAVE to sell GOOG because it is giving me a return on my investment. You are right I would pry never buy gold. But I think of buying something that I don't have to sell. I want to own it and reap the rewards of its earnings. You know what else. Lets say GOOG went to 100 a share and still earned more and more each year. I bet GOOG would start buying back shares with their earnings. If gold goes to 300 an ounce there would be no buybacks buy gold..... all that would happen is gold would stop being mined.

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#16) On April 18, 2013 at 2:18 AM, valuemoney (< 20) wrote:

I ment to say if I buy the gold and DON"T sell it.

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#17) On April 18, 2013 at 2:51 AM, valuemoney (< 20) wrote:

If one understands what I am saying in comment #15 about buying companies they will be MUCH better investors. You shouldn't even look at the price 1st. Look at the company or whatever you are buying and see what it is worth. The price it is trading at on a particular day can vary greatly. But the price you think it is worth or are willing to pay for it SHOULDN'T.Stick to your guns. Don't be swade by what people are saying. They can say your price is silly or whatever. Stop trying to understand the price movements. Humans are buying or selling them lol. Focus on what something is worth and why it is worth that dollar amount. In 2000 ARIBA and many other tech stocks were selling @ RIDICULUS prices. If I tried tell someone CSCO wasn't worth $80 dollars a share it is only worth pry $16 at the time. People might call your price silly because CSCO is trading at $80 but the silly one ends up buying it at $80 and selling it to me at $16.

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#18) On April 18, 2013 at 5:25 PM, awallejr (38.34) wrote:

Value you are simply mixing up arguments.  Owning a company and owning shares of stock in a company are not the same.  If you owned the company you get to enjoy the earnings.  If you own a non-dividend paying share in a company it is nothing but a piece of paper (unless you own a large pct in which case you can get on the Board and make money that way).

Go look at CGA and talk to me about numbers.  It is a shame on Value Line for even having that company in their Index.

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#19) On April 22, 2013 at 11:06 AM, valuemoney (< 20) wrote:

I am sorry owning shares of stock in a company and owning a company ARE the same thing. If you own stock in the company you do get to enjoy the earnings. I can explain further if one would like me to. But owning stock means you get to have a percentage of ownership in the company. Earnings stick with the company. Dividends ARE earnings. The company doesn't usually pay out all their earnings. That would be dumb. The stock would never grow in price. Earnings get RETAINED and used for future growth. Or they can be used to repurchase stock. This is why stock price grows or goes down. Sorry it is NOT nothing but a piece of paper. It is ownership in the company. You have things mixed up I would argue. If you don't think so do a blog on it. I would love to see what people think. They might actually learn something from it. I might do one myself in fact.

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#20) On April 22, 2013 at 11:12 AM, valuemoney (< 20) wrote:

Think I am wrong about the earnings? Explain why DTV stock price is going up (which pays no dividend) and NOK stock price has went down so much. Investors choose to pay less for one piece of paper and more for the other one for a reason. EARNINGS are going up in one and down in the other. Thus one piece of paper goes up and one goes down.

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#21) On April 22, 2013 at 11:13 AM, valuemoney (< 20) wrote:

Guess what happens if DTV stops earning money. I bet the stock goes down.

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#22) On April 22, 2013 at 2:29 PM, awallejr (38.34) wrote:

I am not challenging the value of earnings.  That is exactly what drives up a stock.  I am saying that owning 1 share in GOOG is not the same as owning all of GOOG. Owning 1 share does give you an ownership "interest" but gives you no power whatsoever in influencing the business itself.

That 1 share is still nothing but a piece of paper in the end whose price is dictated by events beyond your control.

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#23) On April 23, 2013 at 12:16 AM, valuemoneygreen (53.34) wrote:

I am not saying it does. But that IS how one should look at it. The way you are looking at one share of GOOG is exactly how I look at investing in gold. Why because when you buy gold it does the same thing the piece of paper does nothing. The difference is the share of GOOG gives u a stake in something that gives something back in the form of earnings. And exactly what u said earnings is what drives up a stock.

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#24) On April 23, 2013 at 12:18 AM, valuemoneygreen (53.34) wrote:

The price of gold is just driven by what someone is willing to pay for a hunk of metal that does nothing. Hence my value of gold.

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#25) On April 23, 2013 at 12:26 AM, awallejr (38.34) wrote:

Well we are getting there.  Yes earnings drive the price of a stock. Gold/silver on the other hand should be viewed more as insurance.  I always say buy, hold and monitor when it comes to stocks.  With gold/silver I always say own FOREVER at least 5% of your assets in it.  

The thing about insurance is you want it but hope never to have to use it.  With gold/silver you want it but hope you never have to use it since  then you are facing some nasty things like hyperinflation or armageddon.

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#26) On April 23, 2013 at 12:32 AM, awallejr (38.34) wrote:

The way you are looking at one share of GOOG is exactly how I look at investing in gold.

And with this quote we agree.  I am saying exactly what you just said here.

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#27) On April 23, 2013 at 11:59 AM, valuemoney (< 20) wrote:

If there is armageddon you need a gun and water and food supply. You won't have to worry about the gold bar. Gold isn't insurance. If their is hyperinflation a good company will just garner more of the pie. That is why you invest in stocks. A stock like KO not only keeps up with inflation it BEATS it. Same with most good consumer staple stocks. PEP PG PM K KMB. Look at the returns on them. 0% ones assests should be invested in gold. You are just wasting your money. I can give you at basket of twenty stocks that kill returns of gold over the next 20 years. One more thing. What price would you buy gold at? Would you buy any today at $1400 an ounce?


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#28) On April 23, 2013 at 12:15 PM, valuemoney (< 20) wrote:

Gold should increase in value each year I would think. But what is the current fair price? If you find the fair current price gold should go up the same rate as money supply in the world MINUS the new supply in gold being generated. That is how much gold should go up each year. It is dollars chasing a hard asset that does not change. So I think gold would not even beat inflation because supply is increasing each year. Know look at KO or PEP. Look at their earnings and stock price in 1980. Look at them today. Give me the results. Then give me golds price. Tell me the returns. Then in ten years do the same thing. KO and PEP will be farther ahead yet. So why waste even one dollar on gold? Not me. I hate getting bad returns on my money.

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#29) On April 23, 2013 at 2:23 PM, awallejr (38.34) wrote:

Ok we are going in circles now.   You are free to ignore my advice.  Since I have stated to hold 5% of your assets in physical gold/silver forever the issue of ultimate value will be irrelevant except when to continue to add or to one's estate's valuation.

I am hoping we never see armageddon but should it come to pass people won't want your shares of stock they would want your silver morgans if you want to trade for survival.

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#30) On April 23, 2013 at 7:55 PM, valuemoney (< 20) wrote:

You are starving I have food. You could give me all the silver and gold coins on earth and I would say yeah right those coins do nothing for me and you sarve and die. You should have offered me an assets that will help me like a gun or water or your services. Understand? Gold just sits there doing nothing for me. I would be the same if you tried to give me 5 $100 bills. I would laugh in your face. Those assets do nothing. 

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#31) On April 23, 2013 at 9:58 PM, valuemoney (< 20) wrote:

Listen to you last sentence. You want to trade your gold and silver for survival. I choose survival. Y do u want to trade? Because your assest does nothing! Y would I want it? Answer that question for me. I want something that does something for me. Same as you. You don't want the coins u want an assest that helps you.

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#32) On April 24, 2013 at 12:13 AM, valuemoney (< 20) wrote:

We could have Armageddon but I suggest building a bomb shelter and a years supply of food water, some guns and amo. Spend 5 percent of your money on that because shares of GOOG will be worth nothing same goes for dollars and gold. 

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#33) On April 24, 2013 at 12:16 AM, valuemoney (< 20) wrote:

That is why you won't see me in cash gold or any other non performing assests in my investments.

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#34) On April 24, 2013 at 12:21 AM, awallejr (38.34) wrote:

Value you are being silly now.  From your point of view don't buy silver/gold. 

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