Unfortunately my Father decided to buy the movie soundtrack, which somewhat jaded my view of the film. There is only so much of Lee Marvin singing, “I was born under a wandering star”, that someone into ELP and other Prog Rockers could take!
Time moves on and around one third of my career has been spent in the gold mining sector. It is therefore an area that I know reasonable well and an area that I have maintained an interest in regardless of whether or not I was involved in it at any particular point in time.
It is therefore perhaps not surprising that the sudden drop in the US price of gold below US$1100 /oz caught my attention this week and prompted me to do a little research on the historical price of gold in both US dollars and Australian dollars.
I found the results quite interesting and despite this week's fall I still feel reasonably optimistic about the gold sector particularly in Australian dollar terms, and probably in any currency other than US dollars.
My curiosity regarding gold price history prompted me to undertake a little historical research which I will try and précis in the next few paragraphs.
In order to prepare for economic order in a post-war environment, 730 delegates representing 44 nations met at the Mount Washington Hotel, at Bretton Woods in New Hampshire, USA over the period 1 - 22 of July 1944, in what became known as the Bretton Woods Conference but which was formerly called the United Nations Monetary and Financial Conference. The goal was to aid political stability and foster peace after the end of WW II.
An agreement was signed on the final day of the conference and came into effect in 1945 following ratification by sufficient number of countries. The conference also led to the formation of the International Monetary Fund (IMF).
In essence the Bretton Woods agreement led to the fixing of currencies to the gold price with the US dollar pegged at $35 per ounce of gold.
The Bretton Woods agreement lasted for 26 years until, under the presidency of Richard Nixon, the United States, on 15 August 1971, unilaterally terminated the international convertibility of gold in what became known as the "Nixon shock".
Although intended to be a short term measure, it eventually lead to the abandonment of the gold standard for currencies. By 1973 the US dollar had been devalued to $42.22 per ounce. In October 1976 the US government rewrote the definition of the dollar to remove all reference to gold and from this point onward the international monetary system was based on pure fiat money.
In the brief period between the Nixon shock and the formal removal of the gold standard from the US statutes, the gold price had peaked at US$195 /oz and subsequently fallen to a floor of US$100 /oz.
Its subsequent fall was about 40% slower than its rise and it reached a low of US$313.50 /oz on 8 July 1982, before rebounding at almost the same rate as its initial rise, peaking at US$486.50 /oz on 26 January 1983, subsequently falling again, at around half the rate of its precipitous fall two years earlier.
For the next 23 years gold traded in a range US$257.60 to US$486.50 with a mean somewhere around US$350 /oz.
In December 2005 the price finally broke above the 23 year maximum and commenced its run up to the 24 February 2012 peak of US$1776.40.
Whilst visually the rise looks dramatic in terms of absolute value, it is interesting that the rate of rise was only around 70% of that achieved in the late 1970’s and the absolute increase in percentage terms was actually 10% less, achieving a rise of 243% of the starting value compared with around 254% of that in 1978.
What is apparent, if one looks at the US dollar gold price chart, is that after the 1980 peak and 1982 trough, the metal price had shifted to a new trading range that was sustained for a significant period of time.
This shifting of ranges is not an uncommon phenomenon in commodities. The phosphate price for example experienced a similar range shift between 2007 and 2009.
In April 2007 the rock phosphate price had been US$45.50 per tonne, a level at which it had traded at for at least the preceding six years. By August 2008 it had peaked at US$450 per tonne only to crash back to US$90 per tonne by July 2009. However it quickly recovered to be trading above US$100 per tonne by April 2010 and has more or less traded in a range US$125 to US$150 per tonne ever since. Anyone who has undertaken training in statistical process control will tell you, that that is more than enough data to establish that a shift in the operating range has taken place.
Whilst nothing about gold could or should be regarded as predictable, the trends of the early part of this century and the late 1970’s early 1980’s are similar, even if the exact rates of change and absolute increase in price differ. I therefore thought it would be an interesting exercise to extrapolate the available data to see what it might predict for the fortunes of gold.
Accepting that the fall in gold price might mirror the 1982 fall of 53% of the peak would suggest a low of around US$827 /oz, before a rebound of 55% to US$1284, followed by a fall again to around US$787 /oz, with another rebound to around the US$903 /oz level, which could represent a longer term average level.
At first glance this looks to be a less than rosy outlook and certainly one likely to discourage investors. And in US dollar terms I would certainly agree. But if one looks at these same key price points in Australian dollar terms a slightly different and more optimistic picture emerges.
Whilst the initial peaks and retreats mirror those of the US dollar price, the peak in 1980 was followed by two higher peaks in 1986 and 1987, and whilst the price retreated in 1988, the changes in the exchange rate generally smoothed out the fluctuations in the US dollar price over the ensuing period up until 2005, making the fluctuations less pronounced.
The spike in the US dollar price in 2009, which appeared as a noticeable blip on the US$ chart appears grossly exaggerated in the Australian dollar chart.
Towards their peaks both charts have similar characters, but what is noticeable is that once the fall in the US dollar price starts to emerge so does the cushioning effect of the exchange rate. In fact one would have to acknowledge that over the past 12 to 18 months there is a clear disconnect between the trends of the two charts as our commodity dominated currency kicks in. So whilst the US dollar price has fallen 38% from its peak, the price in Australian dollars has only fallen 15%, a significant differential.
Beyond this everything is speculation. So for what it's worth, here is my speculation based on both of the Australian dollar experience of the 1970's and 80's and the current differential between the US dollar curve and the Australian dollar per.
I see the Australian dollar price bottoming out at around A$1110 /oz by March 2016 followed by a correction to around A$1350 /oz, 12 months later. A further retracement to around the A$1150 followed by a rebound to A$1550 is possible, and then a fall to A$1350 occurring by about April 2018. If the trend were to continue as it did in the 1980’s then we could see the Australian dollar gold price trade in the range A$1350 to A$1550 for a few years after that.
A large proportion of Australian producers have an all in sustaining cost (ASIC) of between A$1000 and A $1100 per ounce, suggesting that most will survive the bottom of the cycle. This is both comforting and logical, for whilst gold; because of its use as a store of wealth, is not a commodity driven by the laws of supply and demand, in its weakest times it should reflect the cost of production.
Mine is but one of many forecasts of the future gold price. The only thing certain about such forecasts is that most of us will be wrong and a few will be more or less right. The question for anyone involved in the sector is who is most likely to be correct?
I recall once having a conversation with Nick Holland, then CFO now CEO of Gold Fields when I was Australian Country Manager for that company.
We were musing on the predictability of the price of gold and I mentioned that as a student I had read a paper by an academic who had undertaken a research project trying to come up with a method of forecasting the price of gold. His conclusion was that one might as well peer into a crystal ball as try and predict the price of the metal, because he could find no model to do so.
Nick confided in me that Gold Fields had engaged a consultant to undertake modelling to try and predict the price of gold within a range. In this regard the project has been a success. The model predicted the price of gold at the time, to lie in the range US$200 per ounce to US $2000 per ounce! A triumph of accuracy over precision.