Thursday, September 15, 2011

Gold to have its 11th straight annual gain

Analysts are thinking that gold could reach $2000/oz by the end of the year. However, there is a disconnect between the cost of mining and prices. Production costs are not relevant for gold. Gold is not driven by supply cost but rather demand issues. Gold has continued to move higher even while other precious metals have been more range-bound. Inflation is still high with the latest CPI up to 3.8% for the US, but fear may be a more important driver. 

The correlation between gold and the vix index is now above .9 while earlier in the year it was at -.8. The correlation between the CPI and gold has been below .2. Of course, the time frames are different since you can only look at inflation on a monthly basis, bu the impact of risk on gold has been significant. It is the uncertainty which will drive the price up to $2000/oz.  


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