In another echo of the 1970s, Bloomberg reported that the chairman of Barrick Gold Corp sees a "frightening" trend toward higher gold prices.
Barrick Gold Corp. Chairman Peter Munk said an “unpleasant and frightening” trend of investors buying gold as protection against uncertainty in world markets may help push the metal over $1,000 an ounce.
Munk, founder of Toronto-based Barrick, the world’s largest gold producer, said he has received an increasing number of calls from wealthy investors looking for ways to buy bullion. While that is positive for the metal market, it is a “sad part of a civilized society,” Munk said.
“That’s not where you want to be, it’s alarming,” he said today in an interview from Davos, Switzerland, where he is attending the World Economic Forum. “Do I personally believe gold will break through $1,000? It’s not a question of if, it’s a question of how soon.”
As the article points out, this may be good news for holders of gold and claims on gold production, but it is decidedly troublesome for the global economy. This is primarily because it implies rising inflation and falling financial asset values in the years ahead. We made this point to clients in our 2009 Outlook, which will be posted on our public website shortly (2/9/09 – now available at http://www.symmetrycapital.net/idlespeculation/20090209.pdf). If there is any benefit to rising inflation, it’s that debtors will see their debt service burden fall in real terms. Unfortunately, this is only true for those who are able to stay afloat as inflation takes hold, and it means a corresponding loss for creditors, who will demand greater compensation for risk taking in the future, all else equal.
By our reckoning, gold north of $1,000 would imply an annual inflation rate of 4 to 6% in the next one to two years, as things now stand. Added to a 7 to 8% unemployment rate, you get a Misery Index (unemployment rate plus inflation rate) of 11 to 14%. However, if gold repeats its bubble performance of the 1970s, the Misery Index could go much higher. Back then, when all was said and done, gold settled at a level ten times higher than it had been in the early 1960s. Conservatively, that would put gold at $2,500 to $3,500 per ounce today, which would almost certainly signal double digit inflation in the years to come. And based on our prediction that unemployment could peak at 11-12%, the Misery Index could exceed 20%, perhaps even surpassing its June 1980 high of 22%.
Some analysts and economists argue that inflation is ‘good’ for stocks, at least over the longer term. However, under our regression-derived models, a gold price of $2500/oz would imply 400-500 on the S&P 500, a decline of 40-50% from current levels, while $3500/oz would call for a value of 200-300 on the S&P 500, a decline of 65 to 75% from current levels. A gold price of $1500/oz would imply an S&P 500 value of 600-650. Let’s hope that Chairman Munk’s forecast for gold is overly bullish. If not, we’d expect the Misery Index to rise and stock market indices to fall.
URLs:
http://www.bloomberg.com/apps/news?pid=20601082&sid=aXiv1sHNjvsk&refer=canada#
http://en.wikipedia.org/wiki/Misery_index_(economics)
http://www.miseryindex.us/
http://www.iht.com/articles/2008/08/15/business/mcolumn16.php
Idle Speculation | art January 14, 2010 | 
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