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The Case For $500 Gold


Platinum Bling
Platinum Bling
Apr 5, 2010
The Case For $500 Gold


Dec. 11, 2016 4:53 AM ET
by: International Perspective

International Perspective

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Gold's chart has the characteristics of a speculative bubble, and there is significantly more downside.

The catalysts that pushed gold into bubble territory have become headwinds.

Gold is now moving to its inflation adjusted average of $500 per ounce.

We are at the end of a historic gold bubble that began with the great recession in 2007, reached its peak with the monetary stimulus of 2011-12, and now winds down as the global economy normalizes. In the coming years, gold could return to its long-term inflation-adjusted average of $500 per ounce.

This may seem like an impossibly low number. After all, $500 per ounce is less than half the current price of the metal and 1/3rd of its peak price.

To understand why gold could eventually hit $500, we need to see it as a bubble, remembering that the precious metals trade is inherently a speculative trade, and there is no real way to determine the intrinsic value of gold.

Click to enlarge

Source: Forbes

We can break the chart into four stages: Stealth (1990 to 2006), First Bear Trap (The Recession) and then finally the new paradigm (2011-12).

We are currently at the end of the "Return to Normal' phase.

Gold Price in US Dollars data by YCharts

As the economy normalizes to pre-recession interest rates we will begin to see the fear, capitulation, and despair that could eventually send prices back to the inflation-adjusted average of around $500 per share.


Source: Forbes.

Gold is loosely related to supply and demand, but these forces don't seem to have much impact on price. Normal, non-speculative forces - demand for jewelry dental equipment, earphone jacks, etc., - will probably keep the price of the metal mean reverting around an inflation-adjusted average of $500.

Gold prices are buoyed by the metal's scarcity in nature; however, this scarcity is defrayed by the fact that the metal is rarely destroyed or chemically altered in industry. Almost the gold ever mined is still in existence.

It is interesting to note that as the gold rally picked up steam in the mania phase from 2006 to 2012, the metal's cost of production also rapidly increased - much faster than the rate of inflation. In a regular market, competition and improving technology should theoretically drive production costs down.

So why has this not been the case for gold?

The gold price doesn't seem to move on supply and demand; consequently, when the metals price began its dramatic ascent, previously unprofitable mines became profitable, and the average cost of the producing metal went up.

This background is important because it also explains why productions costs will NOT provide a price floor for the metal as it returns to $500 per ounce. This is bad news for the gold mining industry (NYSEARCA:GDX) and (NYSEARCA:GDXJ).


The gold bubble was caused by a variety of factors which will be listed here, along with the reason why they will no longer support prices going forward.

Growth in China and India

As the economies of China and India entered exponential growth, the citizens' purchasing power also increased. Both India and China have traditionally used gold as a store of wealth, and because the currencies of these nation's are poor stores of value, gold was the perfect medium of savings.

The gold price in Indian rupees dramatically outperforms the metal in dollars. It is little wonder why wealthy Indians would rather store savings in gold over cash.

Gold Price in Indian Rupee data by YCharts

However, this once bullish catalyst is quickly becoming the opposite. In India, gold is often used as a way to launder money and avoid taxes. This problem occurs because the Indian government has decided to restrict and regulate the trade of the metal.

Gold can only be imported through licensed dealers, and these dealers impose substantial premiums to the consumer. As a result, the price of physical gold in India often widely diverges from the spot price in the rest of the world.

As a result of this market inefficiency, a black market developed whereby smugglers import gold into India from the cheaper international market and can undercut local prices. This illegal gold is purchased with high-denomination notes (often fake) as a way to launder money.

Instead of reversing its failing restrictions of the free market, the Indian government has decided to ban high-denomination notes, destroying the Indian gold market. In China, the government has similar controls on gold importation, and the metal is regulated to prevent capital flight from the country.

As both of these countries (which make up the vast majority of global gold demand) take an increasingly hard line against gold, it loses a source of significant support.


Gold-based ETFs like GLD and the Ishares Gold Trust (NYSEARCA:IAU) made it easy for retail investors to actively trade gold. These products came out in the early 2000s and now hold over 1,000 tons of the metal - more than many central banks. Gold's price impressive price behavior since then is no coincidence.

The SPDR Gold ETF has been one of the best-performing major ETFs, and from its inception in 2004 to 2013, the security completely trounced the S&P 500. However, this came at the cost of fundamentally altering the gold market.

GLD data by YCharts

In the past, when institutions almost completely dominated gold investment, gold usually waited until seeing real inflation before rallying. Now, gold rallies on the mere expectation of inflation. When this inflation fails to materialize, prices lose support.

Overall, gold has become a much more speculative trade as a result of the ETFs. With gold so readily available via exchange-traded products, the metal loses its price protecting illiquidity. Investors are much less committed to holding GLD compared to physical bars of metal.

For the last few years, GLD has begun to dramatically underperform the stock market.

GLD data by YCharts

As GLD continues to underperform the stock market, investors will begin to feel an opportunity cost of holding the metal and the boost to prices caused by the creation of these ETFs may begin to reverse.

Low-Interest Rates, Low Real-Yields, and Speculation

Much of gold's performance from 2007 to the present seems to be predicated upon historically low-interest rates because when rates are so low, interest bearing assets like the ten-year Treasury lose their appeal.

Effective Federal Funds Rate data by YCharts

Gold has a close relationship with real yields. When real yields are negative, gold tends to perform well. However, when real yields go up gold tends to underperform.

The Paradigm has Shifted

There is one strong argument that can be made for gold. The metal is a good hedge against government default. Many gold bulls would argue that the amount of debt held by major economies like China and the United States is unsustainable, and will eventually lead to a debt crisis.

In response to an unpayable amount of debt, the United States will be forced to inflate its currency into worthlessness.

US Public Debt data by YCharts

While this argument sounds good in theory, there is little real-life precedent for this sort of event. When we look at the example of Japan, a country with debt at 2X GDP we don't see inflation or currency devaluation.

Japan Central Government Debt data by YCharts

On the contrary, the Japanese yen is unusually strong and suffers from deflation instead of inflation. There seems to be little reason to expect the U.S's debt is insurmountable, and that inflation will lead to the collapse of the dollar.


Gold is in a long-term bear market, and I believe this trend will end when the metal hits its inflation adjusted average of $500 per ounce.

The three catalysts that pushed gold into bubble valuations are no longer able to sustain the current prices. In addition, they may even have the opposite effect as Chinese/Indian demand begins to fall in the face of government regulation, and fears of hyperinflation brought on by lose monetary policy simply don't materialize.

Over the coming years, gold prices will be pressured back down to pre-recession levels. I believe the metal will hit $400 at some point before settling at its pre-recession price of $500-650.

This price represents significant downside from the metal's current price. Investors can capitalize on these developments by shorting the SPDR Gold Trust ETF , and the gold miner's indexes and .

Disclosure: I am/we are short GDXJ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


Gold Member
Gold Chaser
Site Supporter ++
Mar 31, 2010
Shoot me now & get it over with.


Deep Sixed
Sr Site Supporter
Mother Lode
Mar 30, 2010
I will have all the Sovereigns! All of 'em! Ha! Feck Yeah! . .


Gold Member
Gold Chaser
Midas Supporter
Feb 21, 2012
On the top shelf.


Midas Member
Midas Member
Midas Supporter
Jan 7, 2011
If $500 ever made it to paper price there will be record premiums if you could locate any physical.

It costs too much to mine it. It would need to be synthesized from some cheap elements to find cost effective availability.


Silver Member
Silver Miner
Jun 8, 2014
If gold goes below 1000, it will be there for the next 50 years. Im sorry, but not happening


Gold Member
Gold Chaser
Mar 31, 2010


Silver Member
Silver Miner
Jan 3, 2014
I don't know how anybody can be so sure of themselves.... About PMs.... And politics.


Site Supporter
Site Supporter
Apr 11, 2010
Gold may go to 500 something, but USD will not be metering golds value if and when it does.
Look at the first generalizing chart "main stages in a bubble".
As far as I am concerned, gold has only passed through three of the first stages.
Considering the trillions of debt utilized to sustain image of financial structure.
I dare say the outline of the USD/gold pattern is a shadow of the truth, and why we have only just past through stage 3.

To conclude "gold prices will be pressured back down to pre-recession levels" when US and world's debt obligations are tanking
global economies to depressions... militarized money regulations will be mandatory.
Arguing or discussing metal without mining/production, demand, supply, paper contracts; only debt and currency factors is narcissistic.