The following chart, we propose, has the potential to inspire a whole new way of looking at the gold and Treasury market...That was posted five days before gold hit an intermediate term high of $1715, which it hasn't seen since, and probably won't see for some while.
When I got around to reading her piece a month later I reasoned, with the mental acuity of a bright six-year-old, "Saaay, if it can't go up any more..."
Of course in subsequent posts I'd write something to the effect: "Now if you cut out the upside (...Capped) you are left with the semi-variance which means you can design extremely high reward bets...."
Anyhoo, this article is based on the work of Claude Erb who has graced these pages a few times, links below.
Front futures $1097.60, up $9.20.
Opinion: Study predicts gold could plunge to $350 an ounce
Gold bugs, who have just begun to digest bullion’s more than $100 drop over the past month, need to prepare for the possibility of an even bigger decline.
That, at least, is the forecast of Claude Erb, a former commodities manager at fund manager TCW Group, and co-author (with Campbell Harvey, a Duke University finance professor) of a mid-2012 study that forecast a plunging gold price. They deserve to be listened to, therefore, since — unlike many latter-day converts to the bearish thesis — they forecast a long-term gold bear market when it was only just beginning.
You might think that, with gold now trading more than $500 lower than when the study was released, Erb would declare victory and leave well enough alone. But Erb is doing nothing of the sort. Earlier this week, he told me that the gold community now needs to consider the distinct possibility that gold will trade for as low as $350 an ounce.Previous posts Mr. Erb shows up in:
Erb bases this particularly chilling prospect on two premises. The first is gold’s fair value, which is currently $825 according to the formula proposed in Erb and Harvey’s study. The second is the likelihood that, whenever gold does eventually drop to fair value, it will overshoot and drop to a much lower value. He calculates that, if gold drops below fair value to the same extent it did in the mid-1970s and the late 1990s, bullion would trade around $350 an ounce.
Erb acknowledges that gold’s true believers will find such a prospect outrageous, if not simply incomprehensible. But, he asks, why should gold behave differently than any other asset, each of which fluctuates markedly from the extremes of over and under value?
Erb uses the five well-know stages of grief to characterize where the gold market currently stands. Those stages are denial, anger, bargaining, depression and acceptance, and he argues that the gold-bug community currently is in the “bargaining” stage.
He argues that, in mid-2012, the gold bugs were in the denial phase. His and Harvey’s forecast of gold around $800 an ounce was met with almost total incredulity. Today, in contrast, with gold more than $500 an ounce lower and forecasts of sub-thousand-dollar gold now relatively common, the gold bugs have progressed through the anger phase and are now “bargaining with God.”
Erb imagines them saying the functional equivalent of: “So long as gold stays above $1,000 an ounce, I’ll go to church every Sunday.”...MORE
Classic Paper: Returns from Commodity Futures
"The financialisation of commodities"
Barron's on Gold and Real Interest Rates
AQR's Cliff Asness: "Fact, Fiction and Momentum Investing"
Here's Erb and Harvey: "The Golden Dilemma" and Erb "Betting on 'Dumb Volatility' with 'Smart Beta'", both at SSRN.