Predictions For 2022 - Prediction 3 – Gold Heads Towards $3,000 An Ounce

Prediction 3 – Gold Heads Towards $3,000 An Ounce

Part of the basis for this prediction was that, with rising inflation, the price of production of gold would rise. Inflation did rise during 2021, but the imposition of repeated lockouts and lockdowns, whilst liquidity was again diverted into speculation in assets, limited its extent. It is set to rise much more in 2022, as economies open up once more. The introduction of tapering of QE, still means that the amount of liquidity injected increases, but just at a slower pace. Only Quantitative Tightening will actually reduce it, and so inflation is going to continue to be fed, and, as economic activity expands, so more of it feeds into commodity price inflation rather than asset price inflation.

In the fourth long wave cycle (1949 – 1999), gold hit its high, relative to other commodities, in 1961. But, its highest money price came in 1980, at around $800. What does this mean? Well, if you measure the prices of other commodities in quantities of gold, then, in 1961, less gold was required as an equivalent of all these other commodities in aggregate. There are a number of reasons why that might be the case. Firstly, to get at gold becomes increasingly difficult. The drive to explore for new sources of gold itself depends upon the price of gold having risen considerably so as to make such exploration worthwhile. Its worth noting that, after the gold price rose sharply from its cyclical lows of around $250 an ounce in 1999, new exploration began to take place on a large scale in Central Asia.

Without new fertile mines, expanding gold production tends to suffer from short-run increases in marginal costs. It becomes necessary to mine at ever deeper levels, for example. In South Africa, gold mines are now so deep, that a large cost is involved just in energy to cool the mine so as to make work possible. Direct energy costs for all gold mines account for around 20% of total costs. Increased energy costs are thought to account for about 50% of increases in gold production costs. This is consistent with Marx's long wave analysis in Theories of Surplus Value, Chapter 9, and his explanation of how this relates to the long term movement in primary product prices, with the opening up of new sources of supply.

By contrast, the supply of other commodities can be increased quickly, whilst producing not rising, but falling short-run marginal costs, and certainly falling medium-run and longer-run costs. So, in 1961, as the long wave cycle entered its Summer Phase of expansion, increased production led to falling costs, whilst gold production, which continued to occur from existing mines, faced higher costs. During the 1960's, and 70's, however, increased liquidity from central banks, primarily led by the US Federal Reserve, to finance the Vietnam War, and the large expansion of the US welfare state, created increasing levels of inflation, in other words, a serious devaluation of money tokens. As a consequence the money prices of all commodities rose by large amounts, and, in order to try to protect profits, by allowing firms to continue to raise prices in response to rising costs, and particularly rising wages, which squeezed profits, central banks continued to increase liquidity, until they made a sharp reversal under Volcker, as inflation reached levels that threatened to destabilise the system.

The money price of gold, therefore, could rise hugely, during the 1970's, whilst its price relative to other commodities declined.

But, there is another reason why gold prices rise, and that is speculation itself. In conditions where people fear that currencies are being devalued on a weekly or even daily basis, they seek security once more in a money commodity such as gold, rather than the increasingly worthless paper money tokens. Its why, in 1971, Nixon made it illegal for individuals to hold physical gold bullion, at the same time that he closed the gold window and ended the nominal link of the Dollar to gold. It then becomes just another aspect of speculation in assets. But, as set out in relation to Prediction 1, such speculation is influenced by numerous subjective factors in the short-term.

For example, Libertarians and adherents of the Austrian School, although they like gold and silver for these reasons, have, more recently, been attracted to Bitcoin and other cryptocurrencies. They like them, because they see them as alternatives to fiat currency, or money controlled by the state. The fact that cryptocurrencies have no value – they are not commodities in their own right, as is gold and silver, for example – does not bother then, because they do not consider that value exists other than as market price, itself purely determined by the interaction of supply and demand. Of course, there are many others who like cryptocurrencies for similar reasons. Criminals, and anyone wanting to hide their money, as well as all of the kleptocratic regimes, across the globe, that have multiplied alongside the growth of populism, in the last few decades, also like the ability to acquire such assets, free from the eyes of authorities. That in itself causes the demand for such assets to rise, especially when promoted, as such, by the populists, and various media outlets that cater for them. Like all Ponzi schemes, and bubbles, the consequent spike in prices become themselves the justification for further speculation, at least until the bubble bursts.

Rather than speculation in gold and silver, therefore, over the last year, speculators have had other options be it crypto, or meme stocks, not to mention tech stocks, which are now in a bubble even bigger than that preceding the 2000 Tech Wreck. A reversal of these other asset prices, as inflation and interest rates rise in 2022, is, therefore, likely to see a reversion to the traditional safe haven for such speculation, in gold, at a time when, its production cannot be increased significantly without large increases in costs.

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