What to Expect for Gold in 2012

What to Expect for Gold in 2012

by Gregor Macdonald

Monday, October 17, 2011

Executive Summary

• Why economic concerns incent miners to produce less gold
• Why gold is set to dramatically appreciate further vs. the stock market
• How the West has sown its discontent by using increasing debt to mask the decline of real wages
• Predicting the gold price vs. the S&P next year

Part I – Gold and Economic Decline

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II – What to Expect for Gold in 2012

As I covered in Part I of this report, Dr. Krugman uses Hotelling rather creatively to explain the strength of gold from an investor’s point of view. I actually think Krugman is also applying a kind of traditional, discounting method of valuation. In essence, he is arguing that because interest rates are so low, the penalty normally associated with holding a non-income-producing asset, like gold or even cash, has evaporated. Indeed, this is the deflationist view, that cash is king because its purchasing power is increasing while the price of goods and services is falling. However, for those of us who prefer gold to cash, we are asking that gold provide additional services by offering protection against instability in the system and maintaining purchasing power more completely over all prices produced by economists and governments, not just price indexes.

But what about gold from the producer’s point of view? Remember, Hotelling says there’s a declining incentive for producers to extract and market their natural resources if the price appreciation taking place in situ (in the ground) is greater than the capital they could earn after having turned those resources into cash. Let’s take a look at more than a century of global gold production, updated with the latest data from the USGS.

I’ll ask what I think is the most pressing question here (though admittedly there are many worthy discussions that spring from this chart): Why was global gold production so strong during gold’s historic bear market, from 1980-2000, at a compound annual growth rate of 3.86%, only to fall — and turn negative — after the year 2000, when gold emerged from its multi-decade hibernation?