ikitov

05-23-09, 10:44 AM

The evolution of gold price can be predicted at a several year horizon in two steps.

1. Sustainable trends in PPI

It was found that the difference between the overall producer price index, PPI, and individual subcategories of the PPI is characterized by the presence of sustainable trends (Kitov, Kitov, 2009b). Similar trends were initially revealed in consumer price indices (Kitov, Kitov, 2008). Therefore, the presence of sustainable (linear and nonlinear) trends is an inherent feature of consumer and producer prices.

For gold price, this feature is also observed. Figure 1 demonstrates the difference between the PPI and the price index for gold ores, both variables retrieved on May 22, 2009 from the Bureau of Labor Statistics web-site – http://www.bls.gov/data (http://www.bls.gov/data). The index for gold was originated in 1985. The difference has two distinct quasi-linear branches: between 1988 and 2001 (June), and from 2001 to 2008 (January). Red and blue lines highlight segments between 1988 and 2001, and from 2001 to 2008, respectively. Corresponding linear regression lines in Figure 1 have slopes of 4.7 and -11, respectively.

The presence of linear trends in the difference between the PPI and the index for gold ores is now a trivial fact. However, it describes the past rather that foresees the future. Second step is less trivial and is based on an assumption that the presence of sustainable trends will last in the years to come.

2. The trend after 2009

After 2008, a period of high volatility has been observed. This period is related to the turn to a new trend after 2008. A naïve assumption about the new trend is that it will repeat that between 2001 and 2008 but with an apposite sign. (Actual trend may be different but inevitably with a positive slope. Here, we do not consider any other option except the naïve one.) Green line predicts the evolution of the difference after 2008 as a mirror reflection of the linear trend between 2001 and 2008. Because the green line has a positive slope the index for gold will lag behind the PPI since 2009. According to our assumption, the rate of the deviation from the PPI will be 11 units of index per year. However, this lag is only a relative one not absolute. So, we do not know where the index for gold ores will go, if we do not know how the PPI will grow. For example, Figure 2 shows that the PPI has been growing since 1985, but the difference in Figure 1 has different slopes before and after 2001. In other words, the growth in the difference after 2009 does not indicate that the index for gold ores will decline. The decline will happen only in the case if the PPI will grow at a rate lower than 11 units of index per year. So, the question is how fast the PPI will grow?

We have answered this question several years ago. After 2008, inflation in the United States will be falling down to and then below zero (Kitov, 2006ab; Kitov, Kitov, Dolinskaya, 2007). Accordingly, the PPI will not be growing during the next 5 to 10 years, after it recovers by 20 units by the end of 2009 due to increasing oil price (Kitov, 2009; Kitov, Kitov, 2009a).

So, now we can refer the index for gold ores to the constant PPI since 2010. Without loss of generality, we put the 2010 level of PPI at 190. Then, the index for gold ores will fall from 230 units in 2008 to 165 in 2015. Figure 2 illustrates the prediction – the price for gold ores will drop by 75 units or by 75/230=0.33 or 33%.

Conclusion

The difference between the PPI and the price index for gold ores is characterized by the presence of two sustainable quasi-linear trends between 1988 and 2008, with a turning point in 2001. It is likely that the difference in the next 5 to 10 years will show similar behavior, i.e. we will observe a new robust trend. To continue the previously observed pattern, the new trend should be characterized by a positive slope, which absolute value can not be currently determined.

For the sake of simplicity, it is assumed that the new trend will repeat the previous one but with an opposite sign. At the same time, the PPI will not be growing during the next decade because inflation in the US will approach the zero line. As a result, gold price will be falling by ~11 units of index per year during the next seven years. If the slope will be higher than 11 units per year, the next trend will be shorter, and vice versa. The absolute change of 75 units is likely to be the same for any slope.

Apparently, the above estimates are only crude ones and actual duration and slop will be determined only in several years. However, the fall in gold price by about 35% is practically inevitable, if the link between the PPI and the index for gold ores will retain.

http://4.bp.blogspot.com/_mU_FH0SZ_Ig/ShgGuma_1mI/AAAAAAAABkc/umHaoAUMfWk/s400/image002.gif Figure 1. Evolution of the difference between the PPI and the price index for gold ores between 1985 and 2009. Red and blue lines highlight segments between 1988 and 2001, and from 2001 to 2008, respectively. Green line predicts the evolution of the difference after 2008, as a mirror reflection of the linear trend between 2001 and 2008.

http://2.bp.blogspot.com/_mU_FH0SZ_Ig/ShgGquId0TI/AAAAAAAABkU/X5v-5tQPXXc/s400/image004.gifFigure 2. Evolution of the PPI and the index for gold ores since 1985. Green line – the prediction of the index for gold ores between 2008 and 2015. Thick black line – the PPI at constant level between 2010 and 2015.

References

Kitov, I. (2006a). Inflation, unemployment, labor force change in the USA, Working Papers 28, ECINEQ, Society for the Study of Economic Inequality, http://www.ecineq.org/milano/WP/ECINEQ2006-28.pdf

Kitov, I., (2006b). Exact prediction of inflation in the USA, MPRA Paper 2735, University Library of Munich, Germany, http://mpra.ub.uni-muenchen.de/2735/01/MPRA_paper_2735.pdf

Kitov, I., Kitov, O., (2008). Long-Term Linear Trends In Consumer Price Indices, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(2(4)_Summ), pp. 101-112.

Kitov, I., (2009). ConocoPhillips and Exxon Mobil stock price, MPRA Paper 15334, University Library of Munich, Germany, http://mpra.ub.uni-muenchen.de/15334/01/MPRA_paper_15334.pdf

Kitov, I., Kitov, O., (2009a). A fair price for motor fuel in the United States, MPRA Paper 15039, University Library of Munich, Germany, http://mpra.ub.uni-muenchen.de/15039/01/MPRA_paper_15039.pdf

Kitov, I., Kitov, O., (2009b). Sustainable trends in producer price indices, Journal of Applied Research in Finances, (in press). (Working paper is available: http://mpra.ub.uni-muenchen.de/15194/01/MPRA_paper_15194.pdf)

Kitov, I., Kitov, O., Dolinskaya, S., (2007). Inflation as a function of labor force change rate: cointegration test for the USA, MPRA Paper 2734, University Library of Munich, Germany, http://mpra.ub.uni-muenchen.de/2734/01/MPRA_paper_2734.pdf

1. Sustainable trends in PPI

It was found that the difference between the overall producer price index, PPI, and individual subcategories of the PPI is characterized by the presence of sustainable trends (Kitov, Kitov, 2009b). Similar trends were initially revealed in consumer price indices (Kitov, Kitov, 2008). Therefore, the presence of sustainable (linear and nonlinear) trends is an inherent feature of consumer and producer prices.

For gold price, this feature is also observed. Figure 1 demonstrates the difference between the PPI and the price index for gold ores, both variables retrieved on May 22, 2009 from the Bureau of Labor Statistics web-site – http://www.bls.gov/data (http://www.bls.gov/data). The index for gold was originated in 1985. The difference has two distinct quasi-linear branches: between 1988 and 2001 (June), and from 2001 to 2008 (January). Red and blue lines highlight segments between 1988 and 2001, and from 2001 to 2008, respectively. Corresponding linear regression lines in Figure 1 have slopes of 4.7 and -11, respectively.

The presence of linear trends in the difference between the PPI and the index for gold ores is now a trivial fact. However, it describes the past rather that foresees the future. Second step is less trivial and is based on an assumption that the presence of sustainable trends will last in the years to come.

2. The trend after 2009

After 2008, a period of high volatility has been observed. This period is related to the turn to a new trend after 2008. A naïve assumption about the new trend is that it will repeat that between 2001 and 2008 but with an apposite sign. (Actual trend may be different but inevitably with a positive slope. Here, we do not consider any other option except the naïve one.) Green line predicts the evolution of the difference after 2008 as a mirror reflection of the linear trend between 2001 and 2008. Because the green line has a positive slope the index for gold will lag behind the PPI since 2009. According to our assumption, the rate of the deviation from the PPI will be 11 units of index per year. However, this lag is only a relative one not absolute. So, we do not know where the index for gold ores will go, if we do not know how the PPI will grow. For example, Figure 2 shows that the PPI has been growing since 1985, but the difference in Figure 1 has different slopes before and after 2001. In other words, the growth in the difference after 2009 does not indicate that the index for gold ores will decline. The decline will happen only in the case if the PPI will grow at a rate lower than 11 units of index per year. So, the question is how fast the PPI will grow?

We have answered this question several years ago. After 2008, inflation in the United States will be falling down to and then below zero (Kitov, 2006ab; Kitov, Kitov, Dolinskaya, 2007). Accordingly, the PPI will not be growing during the next 5 to 10 years, after it recovers by 20 units by the end of 2009 due to increasing oil price (Kitov, 2009; Kitov, Kitov, 2009a).

So, now we can refer the index for gold ores to the constant PPI since 2010. Without loss of generality, we put the 2010 level of PPI at 190. Then, the index for gold ores will fall from 230 units in 2008 to 165 in 2015. Figure 2 illustrates the prediction – the price for gold ores will drop by 75 units or by 75/230=0.33 or 33%.

Conclusion

The difference between the PPI and the price index for gold ores is characterized by the presence of two sustainable quasi-linear trends between 1988 and 2008, with a turning point in 2001. It is likely that the difference in the next 5 to 10 years will show similar behavior, i.e. we will observe a new robust trend. To continue the previously observed pattern, the new trend should be characterized by a positive slope, which absolute value can not be currently determined.

For the sake of simplicity, it is assumed that the new trend will repeat the previous one but with an opposite sign. At the same time, the PPI will not be growing during the next decade because inflation in the US will approach the zero line. As a result, gold price will be falling by ~11 units of index per year during the next seven years. If the slope will be higher than 11 units per year, the next trend will be shorter, and vice versa. The absolute change of 75 units is likely to be the same for any slope.

Apparently, the above estimates are only crude ones and actual duration and slop will be determined only in several years. However, the fall in gold price by about 35% is practically inevitable, if the link between the PPI and the index for gold ores will retain.

http://4.bp.blogspot.com/_mU_FH0SZ_Ig/ShgGuma_1mI/AAAAAAAABkc/umHaoAUMfWk/s400/image002.gif Figure 1. Evolution of the difference between the PPI and the price index for gold ores between 1985 and 2009. Red and blue lines highlight segments between 1988 and 2001, and from 2001 to 2008, respectively. Green line predicts the evolution of the difference after 2008, as a mirror reflection of the linear trend between 2001 and 2008.

http://2.bp.blogspot.com/_mU_FH0SZ_Ig/ShgGquId0TI/AAAAAAAABkU/X5v-5tQPXXc/s400/image004.gifFigure 2. Evolution of the PPI and the index for gold ores since 1985. Green line – the prediction of the index for gold ores between 2008 and 2015. Thick black line – the PPI at constant level between 2010 and 2015.

References

Kitov, I. (2006a). Inflation, unemployment, labor force change in the USA, Working Papers 28, ECINEQ, Society for the Study of Economic Inequality, http://www.ecineq.org/milano/WP/ECINEQ2006-28.pdf

Kitov, I., (2006b). Exact prediction of inflation in the USA, MPRA Paper 2735, University Library of Munich, Germany, http://mpra.ub.uni-muenchen.de/2735/01/MPRA_paper_2735.pdf

Kitov, I., Kitov, O., (2008). Long-Term Linear Trends In Consumer Price Indices, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(2(4)_Summ), pp. 101-112.

Kitov, I., (2009). ConocoPhillips and Exxon Mobil stock price, MPRA Paper 15334, University Library of Munich, Germany, http://mpra.ub.uni-muenchen.de/15334/01/MPRA_paper_15334.pdf

Kitov, I., Kitov, O., (2009a). A fair price for motor fuel in the United States, MPRA Paper 15039, University Library of Munich, Germany, http://mpra.ub.uni-muenchen.de/15039/01/MPRA_paper_15039.pdf

Kitov, I., Kitov, O., (2009b). Sustainable trends in producer price indices, Journal of Applied Research in Finances, (in press). (Working paper is available: http://mpra.ub.uni-muenchen.de/15194/01/MPRA_paper_15194.pdf)

Kitov, I., Kitov, O., Dolinskaya, S., (2007). Inflation as a function of labor force change rate: cointegration test for the USA, MPRA Paper 2734, University Library of Munich, Germany, http://mpra.ub.uni-muenchen.de/2734/01/MPRA_paper_2734.pdf