$900/oz GOLD…maybe

Why do you keep losing money on gold?  Probably because you’re infatuated with it.  Stop thinking of gold as a “precious” metal and start thinking of it as a commodity.  A commodity’s price fluctuates based on supply and demand.  Every commodity is “precious” when it’s in short supply.

I think of gold as real estate, because it’s literally “real” estate.  Where does gold come from?  Out of the earth- it literally is a piece of ground.  Gold is real estate that you can carry around in your pocket.  That’s why it’s been used for millennia as a means to store wealth.

Gold tends to protect against inflation because central banks can’t print it.  Just like beach front property in Malibu, they’re not making any more of it.  But just as land can be developed, gold can be mined.  What’s the major cost of developing land or mining/refining gold?  Energy.

Energy is the reason that gold prices have been stable to declining over the past few years.  It’s been known for at least 4 years that oil reserves would be abundant (because of fracking & horizontal drilling).  I believe that gold has been hovering around $1,200/oz in anticipation of significantly lower oil prices.

As a very general rule of thumb, assume there is a 15 times correlation between gold (oz) and oil (barrel):

$80/barrel oil x 15 = $1,200/oz gold

If oil production keeps outstripping demand (won’t go into that in this article, but it is plausible) then the price of oil could drop dramatically.  The Saudi’s production cost of oil is probably less than $25/barrel.  Fracking is getting much more cost effective, it’s believed that their breakeven point could be well below $60/barrel.

So how would gold get to $900/oz ?

$60/barrel oil x 15 = $900/oz gold

Don’t believe it?  Remember it was only in 1999 that gold hit a low of $256/oz.  The average price of oil in 1999 was $17.98/barrel:

$256 / $17.98  = 14.24

Not too far off the 15 times correlation.

Just some friendly advice, don’t be surprised if gold continues to move lower.

 

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