A Simply Outrageous Call On Gold
Jul. 2, 2015 12:45 PM ET
Summary
- Avi Gilburt is once again making headlines in the financial media.
- His call on the gold price is bold with a price target far above that of his peers, but looking at the historical evidence he may be on point.
- This week I contacted Avi to discuss the forecast in more detail for Seeking Alpha readers.
Last week was different. Last week we saw what is probably the most outrageous call with respect to the gold price in a long time, certainly in my recent memory; not just outrageous in the sense that the projected price target was so large, but because it was made by a firm that is very well regarded within the industry and has a bona-fide history of making correct directional calls on gold. I personally did a double-take when I read the article and saw the BNN MoneyTalk interview.
If you have an interest in gold or the US equity indices, you are probably familiar with Avi Gilburt as he writes regular articles in the media on both. His trading/investing methodologies and his passionate writing style tend to ignite discussion within the investment community, but having read Avi's columns for a number of years now I firmly believe in his analytical abilities, as his track record is among the best in the industry and the vast majority of his calls on the major swings in the market have been correct.
I am used to seeing big calls on gold and mostly disregard them, but I couldn't let this one go by without comment. It piqued my interest straight away, although I have to admit that at first I thought he might have gone crazy. Checking the article again to make sure it was not a misprint, I thought I'd contact him and investigate further - the transcript of our brief call (as you may expect Avi is a very busy man) is below.
Oh, my apologies, if you haven't already read the article or seen the interviews, Avi Gilburt is calling for the gold price to rise to <drum-roll please> $25,000 per ounce!
***
BL: Avi, if I may say so that is a very bold call you have made on the gold price. If I load up the truck right now, how quickly will I be a billionaire?
AG: Well, it all depends on how much you start with! (laughs) But, our higher level targets are based upon 50 year projections.
BL: OK, I understand that this is a very long term call you are making, but scaling back a little for those looking to make some money in the next five years say, can you elaborate on your shorter term expectations?
AG: I see us approaching or even hitting the prior all-time high in gold within the next 2-4 years, and then consolidate again for a year or two before heading much higher.
BL: Wow, so there are potentially some real gains to be had for those with a shorter time horizon, and for those who wish to buy and hold. Should we all be buying right now?
AG: Depends on an investor's time frame. But, on the next drop to lower lows, people should certainly be looking towards the buy side. I have said many times that if someone is not a buyer on the next lows, then they do not belong in this market.
BL: Thank you. You've often stated that you believe the GLD fund to be unsuitable for investors looking to hold for the longer term; perhaps you could explain why and suggest some alternatives and a suitable allocation for the gold portion of an investor's portfolio?
AG: There are significant pitfalls which may be awaiting unaware investors regarding many of the metal's ETF's out there. Being a lawyer, I was asked to go through a prospectus, and what I found quite surprised me. I discuss some of it in a webinar I did not too long ago. I am sure what I found would shock many of your readers. It is not a safe way to "invest" for the long term price appreciation we expect in metals.
BL: The general consensus is that your website is geared towards the frequent trader, but for those wishing to maximize on the, as you have termed it, 'generational buying opportunity' ahead of us, will you be offering any kind of service to someone who wishes to be a part of it but isn't necessarily active within or familiar with the gold market?
AG: Well, we are actually rolling out a managed miners portfolio which has a goal of outperforming the GDX. It will be actively managed by myself, and 3 of my analysts. Effectively, we are pulling out of the GDX those miners we feel will underperform, and are replacing them with strong miners we expect to outperform. We will also be actively managing and adjusting the allocation mix as necessary.
BL: That sounds great. OK, I am being cheeky to ask this because all analysts have their own closely guarded secret methodologies, but can I ask how you have come to calculate your $25,000 price target? What makes you so sure that this target will be achieved?
AG: It is based upon a long term Elliott Wave and Fibonacci mathematics study. If one thinks back to the top we called back in 2011, as gold was going parabolic, we published a top target of $1,915. And as we now know, a parabolically rising gold topped within 6 dollars of our target. That top was identified through a 200 year Elliott Wave and Fibonacci mathematics study I performed.
Furthermore, that same analysis suggested that gold would drop to the 700-1000 region from the 1915 level. Our much longer term higher projections are based upon the same methodology.
BL: That is all very interesting Avi, thank you so much for taking the time out of your schedule to talk to me, and for being so candid with your answers. You've given me much food for thought, and I'll be looking at the projection in more detail for the article I plan to write. Is there anything further you wish to add before I go?
AG: I thank you for the opportunity to address your followers. You have developed quite an amazing following on Seeking Alpha, and they are truly lucky to have you.
BL: Thanks once again, Avi, all the best.
***
Well, first of all I'd like to say thank you to Avi for talking to me which he certainly did not have to do, but secondly we can see that the call is perhaps not as bold as we all initially thought given the expected time frame for it to play out.
Drilling down a little into the numbers, and looking at the long term chart in gold, we can see that it tends to rise exponentially for extended periods then consolidate above the original high prior to the rally taking place:
(click to enlarge)
Looking more closely at historical prices, we can see that when the gold standard was officially abandoned in December 1976 the gold price was just above $130 per ounce (gold convertibility had actually been discontinued unofficially in 1971 allowing the market price to rise from that $35 peg), but in just 3 years had risen close to 8-fold, opening at $910 on January 23rd 1980 to mark what would be the high for the next 28 years. It would appear that whenever you get such an epic boom, you get just as epic a bust.
You might think this rapid price appreciation amazing when you consider how short the time frame was, but in true Buffett fashion 'the best part came just before it ended'. Gold opened at $388 on November 16th 1979, and gained 135% in 10 weeks to make that January 1980 high. Truly amazing in terms of the volatility; I just wish I had been there to trade it.
We saw a similar type rally when gold (finally) bottomed in 1999, albeit over a longer time frame, rising from roughly $250 per ounce to $1910 by August 2011 - another almost 8-fold increase. They say history tends to repeat (or rhyme) and gold, at least recently, seems to love that multiple.
All in all, taking our price from when the gold standard was officially ended in 1976, gold rose from $130 to $1910 in 35 years, representing a 14-fold increase; and if we take our starting point back to when the gold standard was unofficially abandoned, the increase is 55 times the original price in 40 years. Suddenly Avi's price target doesn't seem too crazy right?
Taking it one step further, if gold were to bottom in that $900-$1000 range as Avi suggests (above the original 1980 high) and increase 8-fold, then consolidate above the $1910 high and increase 8-fold once more, well we then have a price approaching at least the $20,000 mark, and somewhat achievable in a 50 year period.
Now I know what people will say - anyone can make this kind of call given that the time frame is so far out in the future, and not that many people will still be around to pass judgment either way - but the key take-away from this price projection is that when gold does put in a bear market low, it is very likely that the price will not be seen again for a long, long time.
Every investor needs a bedrock asset; one that holds its value within their portfolio and rises over the years keeping up with and potentially exceeding inflation that reduces the purchasing power of their savings. Gold could very well fit that purpose masterfully.
Avi would disagree with me that price is influenced by fundamental factors (he believes that sentiment only governs price movement), but I believe it is probably a mix of the two and technical oriented investors therefore need to keep an eye on the fundamental landscape. In my opinion that fundamental landscape is changing fast and the global economy could be on the verge of what will be considered a very volatile period when history comes to judge.
Certainly we will need a catalyst to affect sentiment towards gold and swing the price out of its current downtrend, and as regular readers of my articles will know in the Treasury markets I believe we will find that catalyst.
Despite ECB quantitative easing which should be absorbing much of the eurozone T-bond auctions, and even stimulating demand for Treasuries given that there is a guaranteed bulk buyer to front run each month, yields are rising as the market prices in capital risk.
Liquidity is reported everywhere as being on the decline, amazing when you consider just how much the ECB buy each month, and without a consistent bid price tends to fall fast, as we saw in bunds and the long bond generally just a few months back.
This is having the effect of increasing the cost to service the debt of eurozone countries at a time when GDP is barely growing in most. As the debt to GDP ratio of each country starts to rise, the cost to borrow will increase in line with greater perceived risk and it is likely that liquidity will simultaneously decline along with it. This then exacerbates the problem and will in all likelihood eventually lead to an explosion in interest rates.
Gold the commodity will benefit greatly from both the fear trade and inflation which should result from the rising rate environment. We are therefore likely to see greater demand for tangible assets as a store of wealth at a time when an excess of money is moving out of treasuries and available for use elsewhere.
Although in the short term Avi is calling for new lows in gold, given the current state of the global economy he is right when he says that long term investors should be accumulating now.
With the global economy as it is right now, and as it has the potential to be in the near future, while $25,000 per ounce is certainly a bold call based upon the historical evidence it is perhaps not as outlandish as one might first suspect.
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