Gold and Silver: Outlook 2017


Understanding currencies is critical to understanding gold. Gold is a global currency, it is both an asset and cash and only currency without counter-party risk. Central banks and the IMF hold gold for their international reserves and it’s the only reserve that is not a debt. As of the 3rd quarter 2016 world central banks held 33,092 Tonnes representing 14.7 percent of international reserves.


Official gold reserves held by central banks also represent 16.6 percent of all the above ground gold stock which is supposed to be around 186,200 Tonnes.


Former IMF and Fed economist Kenneth Rogoff, in a recent article, recommends developing countries buy gold and sell US Treasuries to at least 10 percent of international reserves. A survey of 19 central bank reserve managers conducted in the fourth quarter of 2016 by the World Gold Council found that 56 percent of central banks intend to increase their gold reserves over the next three years, while 33 percent plan to maintain their levels of gold reserve. I can see an increase of another 3,000 to 5,000 tonnes of gold added to the world official international reserves in the next five years. Since the 2008 financial crisis central banks increased their gold reserves by around 2,000 Tonnes. The case for gold remains compelling for reserve managers amid the prevalence of negative interest rate policies and diversification away from the US dollar. European Union’s problems also handicap the euro as an alternative to the US dollar. In the last two years both the US dollar and the euro lost their “safe haven” status. Gold and to a lesser extend the Swiss franc and the Japanese yen replaced the US dollar and the euro as safe haven currencies.


Central banks were sellers of gold since the peak reached in 1965 but more intensively since 1990 to manipulate the price of gold. Despite this selling and until they stopped during the 2008 financial crisis, central banks only sold 22 percent of the high reached in 1965. Since the financial crisis of 2008 they bought back 62 percent of the gold sold.

Both China and Russia accumulated large amounts of gold since the 2008 financial crisis and will continue to do so. It is my believe that both target an amount around 9,000 Tonnes which will put them in the “club” between the US (8,333.5 Tonnes) and the Euro Area (10,786 Tonnes). Both China and Russia were major buyer of gold in 2015 and they remained in 2016 and I strongly believe they will continue to be again in 2017 and until they reach their goal.

Central banks buy large amounts of gold for the long term and therefore they take gold out of the market for a long period. The total gold market in 2016 was only 4,525 Tonnes of which mine supply was 3,168 Tonnes (70 percent of total supply).


From a technical analysis point of view there are two scenarios for the price of gold and silver. One says that we ended in 2012 a bull market with gold at $1,900 and that now we are in a correction that will terminate in another down leg ending at $250. The other scenario says gold is in a correction within a secular bull market that started in 2000 at $250 and will complete around $5,000 to $10,000. I personally believe that this is only a correction towards a price of at least $5,000. This pattern resembles the pattern created by the price of gold in the 70s bull market. I believe the 2000 bull market is a continuation of the collapse of the fiat system. Since it was decoupled from gold, the dollar and all the other currencies lost more than 95 percent of their value in gold.

When analysing gold and silver we should not look at them vs one currency in particular but all currencies. The four charts bellow show gold and silver priced in a basket of currencies GDP weighted top 20 countries and also priced in SDR, which is a basket of five major trade currencies.





Gold and US debt have a correlation of about 90 percent. If we look at gold vs world debt, we will see almost the same correlation.


If we look at the world balance sheet we see the same correlation with gold and the same recent divergence. I expect gold to reverse to the debt and balance sheet trend rather than the other way around which means a gold price of at least $1,900.


The next two charts compare the recent gold bull and bear market that started in 2000 to the gold bubble market started in 1970 and that ended in 1980. If a similar pattern is to repeat, gold has been recently in a correction within a secular bull market rather than a secular bear market. The bubble phase has not started yet and we are only in the late stage of the Awareness phase and in a Bear trap. If a similar pattern is to repeat, we will see the gold price rise by approximately 2,000% which means approximately a price of $25,000.



Another price projection would be if US would reprice gold from official $42.33 to 40 percent of monetary base which would mean a price of gold around $5,000 or if 100 percent of monetary base which would mean a gold price of around $10,000. Since 1973 when the gold exchange ended the US “official” price of gold is still $42.22 per ounce despite a market price of $1,200 today. In 2004 when I fist became bullish on gold based on an analysis of US and global debt I concluded to a gold price projection of about $5,000 within 15 years ending with an international monetary system reset. Gold was then $400 up from a low of $250 in 2000. Events since then have not weaken my hypothesis on the contrary they strengthened it.


Most bullish catalyst for the price of gold remains the collapse of the present de facto international monetary system based on the US dollar since the collapse in 1971 of the gold exchange standard (Bretton Woods Agreement). It has been from the beginning in 2004 my main argument for a $5,000 gold price within 15 years.

As the governor of the Bank of England Mark Carney said in 2011, when he was governor of the Bank of Canada, the present international monetary system is close to its Minsky moment. Ben Bernanke, past chairman of the Fed, also said recently that the system is “incoherent”.

Recent Donald Trump election in US, a very anti globalist and anti international institutions, makes the case for a global currency like the SDR a lot less likely. Donald Trump is a gold enthusiast and favours a gold backed dollar. As I said many times a global currency like the SDR requires consensus at least of US, EU, Russia and China within the G20 to be implemented. I don’t see it now after the election of Donald Trump, a strong anti globalist. However, since the US is in such a bad shape the US could, kicking and screaming, rally with the G20. Donald Trump is a bully but in the end, he accepts the best he can get. In other words, he might be forced to accept given bad shape of the US finances.

Robert Mundell, Nobel prize in economics, said in a speech in 1997 that “the United States would not talk about international monetary reform now anyway, because a superpower never pushes international monetary reform unless it sees reform as a chance to break up a threat to its own hegemony. The dollar liabilities of the United States have been rising by bushels and bushels. From a national standpoint, the United States is never going to suggest an alternative to its present system because it is already a system where the United States maximizes its seigniorage. … The United States would be the last country to ever agree to an international monetary reform that would eliminate this free lunch.”

Election of Donald Trump as US president, a “gold bug”, could also have a bullish impact on the price of gold in a different way. Trump is very strong in using gold as a symbol of power and wealth and as such shows himself frequently surrounded by gold. He redecorated the Oval Office at the White House in gold and his New York apartment is gold plated. It will, I think, bring gold in fashion in the jewelry industry just like UK’s prince Charles brought polo in fashion, which will have a marginal bullish effect on the price of gold.


The gold Shariah standard was also adopted at the end of 2016 which will be bullish for gold. This standard doesn’t make physical gold bullion Shariah compliant, as many believe, since it has been already Shariah compliant for thousands of years. What it makes compliant is some paper gold instruments like gold bullion funds and ETFs. Muslims all over the world were big hoarders of gold, as Indians are, as saving and store of wealth for thousands of years and this will not change. Switching from physical to paper gold will not, in my view, affect substantially the demand and therefore the price of gold. However, it will allow investors, mainly institutionals to include in their investment portfolios gold financial products like ETFs.


I have not spoken about silver but almost everything I said about gold is also valid for silver. Even if silver today is not part of the international monetary system like gold, it kept its historical characteristic of money as the poor man’s gold. When gold moves silver follows on steroids. Despite of different demands, with silver having a much larger industrial component, in a monetary crisis the investment/monetary demand dominates by far the industrial demand. Most recent example has been in India were, when restrictions were imposed on gold, people immediately switched to trafficking gold but also buying silver.


A monetary crisis would make gold and silver move with a quantum leap catching every body by surprise creating backwardation both in gold and silver price. A rush by central banks to buy gold and a decision by gold holders not to bring gold and silver to market (called reserve demand) would be observed through backwardation. A run to exchange dollars for gold by central banks in the 60s is what precipitated the collapse of the London Gold Pool in 1968 followed soon after by the collapse of the gold exchange standard (Bretton Woods Agreement) in 1971. I expect a similar stampede to buy gold by central banks again.

Backwardation rarely occurs in monetary assets like gold and silver, because there is always a large available inventory. There is the equivalent of 60 years of gold production and 20 years of silver available. Backwardation in gold and silver is the consequence of interest rate manipulation by the government. Backwardation indicates that people prefer to be holding gold and silver, rather than fiat money (paper money). The gold future contract, cheaper than the spot price, shows that interest rates on gold are more important than fiat money’s rates. The more gold and silver go toward backwardation, the more it shows that there is less gold and silver available to trade against dollars or other currencies.

There will come a time when there will be no gold or silver available to trade against paper currencies. The more gold and silver go toward backwardation, the more it shows that there is less gold and silver available to trade against dollars or other currencies. There will come a time when there will be no gold or silver available to trade against paper currencies. This will be preceded by a large increase in backwardation, all the way to permanent backwardation. Gold backwardation indicates the extent to which gold leases cannot be extinguished by coaxing it from those holding physical gold. Why? Because there is a worry that the gold will not be returned to them.


In conclusion, I think we’ve seen the bottom of this correction in both gold and silver in 2016 and most probable a new bull leg will start by April. A monetary crisis will push gold price over $1,400 and possibly a quantum lip taking gold to $2,000 before any international monetary system reset. 2017 will be a year dominated by major uncertainty and volatility and geopolitical conflicts, which are bullish for gold.

The election of Donald Trump in US ended the pax Americana and the beginning of a transition to a new geopolitical system. We had currency wars since 2008 and now we will also have trade wars. I hope it will not be followed by military wars. It is very hard to predict timing but everything points for a breakout for gold to the upside above $1,400 this year and even possibly testing resistance of $2,000. In worst case, I think gold will remain in this correction phase ($1,100 to $1,400) a little longer but no downtrend.

Annex: Gold and Silver Supply and Demand Charts