Gold Report 2012: Erste's Comprehensive Summary Of The Gold Space And Where The Yellow Metal Is Going

Tyler Durden's picture


Erste Group's Ronald Stoeferle, author of the critical "In gold we trust" report (2011 edition here) has just released the 6th annual edition of this all encompassing report which covers every aspect of the gold space. What follows are 120 pages of fundamental information which are a must read for anyone interested in the yellow metal.

From the report:

The foundation for new all-time-highs is in place. As far as sentiment is concerned, we definitely see no euphoria with respect to gold. Skepticism, fear, and panic are never the final stop of a bull market. In the short run, seasonality seems to argue in favor of a continued sideways movement, but from August onwards gold should enter its seasonally best phase. USD 2,000 is our next 12M price target. We believe that the parabolic trend phase is still ahead of us, and that our long-term price target of USD 2,300/ounce could be on the conservative side.

The study is covering the following topics:

  • Central bank’s monetary inflation supports progressive remonetisation of gold
  • Inflation ? rising prices: confusing terminology with grave consequences
  • The chronology of a hyperinflation – Explanation based on Peter Bernholz’ “Monetary Regimes and Inflation”
  • Gold in an environment of a deflationary loss of confidence
  • The biggest misconception with regard to gold
  • High stock-to-flow ratio is the most important characteristic of gold
  • The advantages of a gold standard
  • Financial repression: the alleged magic formula
  • Why gold remains (dirt) cheap in India and China
  • Excursus on Interventionism - It is a fine line between manipulation and intervention
  • On the search for a “fair value” for Gold
  • Possible price targets for gold
  • Why gold is (still) no bubble
  • Gold improves portfolio characteristics The renaissance of gold in traditional finance
  • Why is gold such a highly emotional topic? Cognitive dissonance and normalcy bias as possible explanation
  • Challenges for the gold miners: Peak Gold and increasing resource nationalism
  • Gold shares (still) with historically low valuations

Some broad observations:

In order to analyse the status quo of the gold bull market, we would like to put the development of the gold price in relation to other asset classes on the following pages. The following chart illustrates that chrysophilites11 still have little to worry about. The left-hand scale shows the ratio of the MSCI World equity index to gold, while the right-hand one depicts the ratio of a total return index of 10Y US Treasuries to gold. The chart clearly highlights the fact that the relative strength of gold (falling ratio) vis-à-vis both asset classes is still intact. Both ratios have been setting lower lows and lower highs and are thus locked in a downward trend. Gold holdings should be reduced only once a significant trend reversal becomes apparent.


We are convinced, that the global monetary expansion should continue to ensure a positive environment for gold investments. The reaction to the current crisis is already feeding into the next crisis. The idea of trying to cure a crisis that was created by an expansive monetary policy and chronically excessive debt with the same poison seems naive. The driving forces of economic health are savings and investment, not consumption and debt.

Central bank balance sheet expansions:

The combined base money supply of the four most important central banks has been growing by 15.2% per year since 2000. According to the Austrian School of Economics, this means inflation. Rising prices are only a logical consequence. From 2007 to April 2012, the balance sheets of the four most important central banks were growing from USD 3,500bn to almost USD 9,000bn. Last year alone, the increase amounted to USD 1,500bn12. The following chart shows the rate of change of central bank balance sheets since the beginning of 2007.


The following chart illustrates the combined base money supply of the ECB and the Federal Reserve. It has increased from USD 1,564bn in December 2002 to currently USD 6,578bn. The gold price more than offset the inflated money supply, increasing from USD 340 to USD 1,600 over the same period.


A chart everyone knows: collapsing purchasing power

The following chart highlights the substantial erosion of purchasing power since 1971. It describes how many units of gold one unit of the respective currency buys. Clearly, purchasing power has been on a gradual slide, i.e. one unit of currency has been worth less and less in terms of gold. The US dollar, the British pound, and the euro13 have lost almost 98% of their purchasing power since 1971. Interestingly, the Swiss franc, which was the last currency to abandon the gold standard, shows relative strength, losing “only” 90% of its purchasing power since 1971. This further confirms the preservation of purchasing power gold provides. We can also see that the downward trends are clearly intact and there is little reason to expect an imminent bottom in the various fiat currencies in relation to gold.


The following chart prompts a similar conclusion. It shows on the one hand the gold/oil ratio (i.e. how many barrels of oil does one ounce of gold buy) and on the other hand the inverted oil price (i.e. how many units of oil do I get for USD 1). For reasons of user-friendliness we have standardised both values at 100 on a logarithmic scale. Whereas the oil price in terms of gold has been stable since 1971, the USD has lost more than 98% of its purchasing power in terms of oil.


And a brief history of the history of global money supply

The following chart illustrates the development of the consolidated global money supply since 1953, expressed in SDRs (i.e. the unit of account of the IMF) and the gold price (red line). According to Peter Millar, a cycle consists of a total of five phases. In phase 1 (1952 to 1968) the money supply was growing at a stable rate of 2.8% p.a. Phase 2 (1968 to 1980) was dominated by monetary inflation and the increase in money supply of 22.7% per year. Phase 3 (1980 to 2000) was again characterised by the fight against inflation and the resulting decrease in monetary expansion (+3.4% p.a.).


We have been in phase 4 since 2001. This phase has been dominated by inflationary instability. In phase 1 and 2, the money supply expanded along economic growth rates. These were phases that provided an unfavourable environment for the gold price, making other asset classes more attractive. Phase 2 and the current phase (due to negative real interest rates, among other things), on the other hand, have created a clearly positive environment for the gold price.


Phase 5 is largely characterised by common Keynesian policies aimed at reducing debt by creating new debt. The Austrian School suggests that the recession will relentlessly uncover flawed investments and misallocations. Even more aggressive monetary expansion is launched against said process. According to Millar in this phase the return to a quantitatively lower monetary inflation is initiated via a monetary reform, the return to a gold standard, or the re-valuation of gold reserves, before a new cycle begins.


Much more in the Full report:


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Wed, 07/11/2012 - 12:24 | 2606415 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Take back the money supply!

On Friday the 13th, Buy Silver!

Wed, 07/11/2012 - 12:28 | 2606438 bigdumbnugly
bigdumbnugly's picture

or if indisposed friday, thursday or saturday will do.

Wed, 07/11/2012 - 13:23 | 2606646 LowProfile
LowProfile's picture

Just make sure you hold it in a 1:10 ratio (gold to silver).

Although it will soar in a near-apocalyptic scenario, if the central banks revalue a PM upwards to repair their balance sheets, it won't be silver... Because they don't own any.

Wed, 07/11/2012 - 13:37 | 2606714 Pladizow
Pladizow's picture

120 page summary = BUY GOLD!

Wed, 07/11/2012 - 14:19 | 2606894 LowProfile
LowProfile's picture

Interesing.  Let's see what they said about silver:

The positive trend of gold during deflation is also confirmed over a longer
time horizon. The following graph highlights the fact that gold (and to a
lesser extent also silver) would record a clear increase in purchasing power
during deflationary phases. 


Wed, 07/11/2012 - 14:41 | 2607038 Pladizow
Pladizow's picture

Whats so funny?

Wed, 07/11/2012 - 15:40 | 2607351 LowProfile
LowProfile's picture

That this well written, well researched, well reasoned paper disagrees with the people shilling for silver (which also seem to be responsible for junking me).

I'm starting to suspect that TPTB want to herd as many people into silver and away from gold as possible.

IMO, you should hold both, but only hold as much silver as you are willing to risk it NOT following suit with gold in a central bank revaluation.  If the CBs put a bid under gold, they won't put one under silver...  Which means silver won't appreciate anywhere near what gold will.

I'm advocating 1:10 gold:silver.  That way if it returns to it's historical ratio, you will do well.  Hold more silver if you think it's a lock that it will return to it's historical ratio - but understand that you are speculating the CBs and government will lose COMPLETE control of the situation.

Wed, 07/11/2012 - 17:10 | 2607756 Peter Pan
Peter Pan's picture

In 2008 whilst holidaying in Greece I came across an Albanian merchant. He told me the story of how his grandfather had spent some years in France before returning to Albana. Shortly thereafter the communist regime took hold and at some point the government started announcing that gold had lost its value and that the government would nevertheless buy it from the people with paper currency. Remember that borders were clsed and the internet was not around.

All their neighbours rushed to hand their gold in. His grandfather swore the whole family to secrecy and never handed in the significant amount of gold he had brought back from France.

He looked at me and proudly told me that even though his grandfather was now dead, the family not only held that original gold but had added to it every year and never sold even in 1980 because things never got bad enough.

I asked him iif the rise in price woud tempt him to sell. He answered with what I believe is the crux of the matter:

'I woud never be tempted because of price. I would sell only because of desperate need and no other alternative.'

So to all of you who hate fiat but drool at the prospect of more balloney dollars, there is your answer to the whole stinking mess and how you should treat your gold.

Wed, 07/11/2012 - 19:08 | 2608187 Skateboarder
Skateboarder's picture

Great story, leader of the lost boys.

The difference is, now there is an internet, and stupid people hand their gold not to governments directly but the cash4gold peeps for some sweet, sweet notes of debt. I really do wonder what percent of the world's population knows what the current and historical prices/valuations (w.r.t. to other resources duh) of gold are/were.

Wed, 07/11/2012 - 13:31 | 2606690 Canadian Dirtlump
Canadian Dirtlump's picture

I believe it would be in line with your avatar to say "I'd gladly pay you tuesday for some ASEs today!"

Wed, 07/11/2012 - 23:39 | 2608846 StychoKiller
StychoKiller's picture

Bluto != Wimpy

Wed, 07/11/2012 - 12:29 | 2606441 Quinvarius
Quinvarius's picture


Wed, 07/11/2012 - 12:35 | 2606460 SILVERGEDDON

It is not where gold is going, it is where paper is going - straight into the bonfire haircut motherfucker zone. Gold is going no where. 5000 years of going no where but into people's pockets as a safety net for avoiding fiat fake debt based currency. Put that in your pipe, and smoke it. Bitchez.

Wed, 07/11/2012 - 13:25 | 2606661 LowProfile
LowProfile's picture

Except CBs might pull a fast one with gold and revalue it upwards, blowing up the manipulation of the past 45 years, and sending it's relative valuation to the Moon...

So it's either a win or WIN!!! with gold...

Wed, 07/11/2012 - 13:56 | 2606787 ATM
ATM's picture

They will only do this after trying the printing. You know, hubris and all. Then they will revalue. 

Wed, 07/11/2012 - 18:36 | 2606924 LowProfile
LowProfile's picture

...I think you may be right (but even if they don't print, there's already enough out there that if it comes home to roost there will be Hell to pay).

But it makes sense they would print to see how far they can push it without dire consequences and THEN revalue.


Edit:  Funny how I get four down arrows, but ATM gets none...  Even though we essentially said the same thing!  LOLOLOLOL

Wed, 07/11/2012 - 12:40 | 2606478 Canadian Dirtlump
Canadian Dirtlump's picture

Amen on that. I notice that despite spot price drops pricing at a few places I checked out has remained the same. I.e. the premium is higher. I don't know if this is because they have inventory they paid a certain price for and are holding the line, the phys and paper price is stating to decouple or what.


I picked up a tube of maples for 30 bucks canadian a pop (30.10 actually) which I was pretty happy with.

Wed, 07/11/2012 - 12:28 | 2606439 SheepDog-One
SheepDog-One's picture

Long term $2,300....hell gold should be far above that already with this ongoing full retard global printfest.

Wed, 07/11/2012 - 12:29 | 2606442 falak pema
falak pema's picture

that Oil to Gold and Oil to USD chart is awesome!

RN must be squirming in his grave! He made that KEY decision in 1971.

Wed, 07/11/2012 - 12:31 | 2606452 swissaustrian
swissaustrian's picture

RN and his advisors knew exactly what they were doing.

Here is his famous TV announcement:

Wed, 07/11/2012 - 13:46 | 2606750 earleflorida
earleflorida's picture

great link swissaustrian:

american made products - then 100% -- now 10%, great!

import tax - temporary fiscal insanity [has been a precursor for every recession/depression in U.S. history]  

RN = father of 'socialist/democracy', where democracy withers away,... as that of a useless appendage falling off an evolving morphing entity into the dustbin of anachronism.

indeed,... Marx's would be proud


Wed, 07/11/2012 - 12:33 | 2606457 fuu
fuu's picture

I like the "Total assets ECB and Federal Reserve (in USD) vs. gold" chart myself.

Wed, 07/11/2012 - 12:44 | 2606491 falak pema
falak pema's picture

yes huge correlation; and a guide to future gold pricing. Watch that CB balance sheet evolve for USD/Euro.

Wed, 07/11/2012 - 12:29 | 2606443 swissaustrian
swissaustrian's picture

GG fucked up big time today, reducing production estimated by 15% and raising cash costs/oz by 20%. Stock is down nearly 10%.

Wed, 07/11/2012 - 12:38 | 2606471 Al Huxley
Al Huxley's picture

Semafo increased reserves by 1.3 million oz to 7.3 million, and they're down 13%.  But that's what they get for finding and producing gold at a profit.  Hopefully this will teach them a lesson.

Wed, 07/11/2012 - 12:44 | 2606494 oddjob
oddjob's picture

Checking L2, #222 JPM is the second largest buyer of Goldcorp today, with no sells.

Wed, 07/11/2012 - 12:35 | 2606451 JustObserving
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We believe that the parabolic trend phase is still ahead of us, and that our long-term price target of USD 2,300/ounce could be on the conservative side.

The FED will fight that tooth and nail using TBTF banks like JP Morgan.  The attacks on gold and silver get more vicious every day.

Meanwhile debt and unfunded liabilities per taxpayer are now $1,190,000 in the US of A.  I think $2300 an ounce is very cnservative.

Wed, 07/11/2012 - 12:39 | 2606474 OutLookingIn
OutLookingIn's picture

Attacks on each others paper price.

While Asia continues to make off with the real thing, at fire sale prices!

Wed, 07/11/2012 - 12:33 | 2606456 chubbar
chubbar's picture

So within a 12m price of 2K and long term price of 2.3K they are expecting a parabolic move? 2.3 has to be VERY conservative if that is going to happen. Not much of a dollar devaluation to get to a 2.3K price given we've already seen 1.9K as a short term high, so I guess all our problems must get solved pretty soon for those prices to be accurate.

Wed, 07/11/2012 - 12:34 | 2606458 Soda Popinski
Soda Popinski's picture

Where gold should and will go is the paradox.  The cartel sits at the basket like a 7 foot center, goal tending every time gold scores.  The Refs (CFTC) continue to look the other way.

Wed, 07/11/2012 - 12:35 | 2606459 aleph0
aleph0's picture




Check this out ... Wow.

Wed, 07/11/2012 - 12:41 | 2606482 Al Huxley
Al Huxley's picture

That is - hilarious, unsurprising, and extremely depressing, all at once.  Nice find.

Wed, 07/11/2012 - 12:58 | 2606544 OutLookingIn
OutLookingIn's picture

Too many layers of regulations, with too many departments enforcing.

Each department not knowing what the other is doing.

All the while staffed by incompetents, who don't know their ass from a hole in the ground!

Wed, 07/11/2012 - 13:08 | 2606579 Bay of Pigs
Bay of Pigs's picture

Enforcing what? LOL...

Wed, 07/11/2012 - 13:54 | 2606780 Pladizow
Pladizow's picture

Easily the smartest chick I want to bang!

Wed, 07/11/2012 - 14:12 | 2606854 ATM
ATM's picture

Always blame incompetence, confusion, and the left hand not knowing what the right hand is doing. That's bullshit.

The system has been created exactly so that these thieves can rape and pillage and then plead ignorance!

Fuck them.

Wed, 07/11/2012 - 15:16 | 2607219 Mikehy
Mikehy's picture

The problem (i think) is that rules are too intricate nowadays. Counterintuitively, it is easier to get around complex detailed rules than it would be to get around very simple rules. For instance if there was a law saying simply "a bank had to have a cash reserves of X% of their balance sheet" it would replace hundreds of pages of current regulations and rules and would be harder to work around than the current system.

Politicians and regulators like to think they are smarter than most people, but the simple fact is that people with an incentive to overcome the spirit of the law always will because a) they are typically smarter than a politician and b) have a huge incentive to find loopholes.

The less complex regulations are the better in my mind

Wed, 07/11/2012 - 13:03 | 2606563 Diet Coke and F...
Diet Coke and Floozies's picture


Wed, 07/11/2012 - 13:35 | 2606706 JackT
JackT's picture

Gotta go thru Google cache (July 8th, 2012) to see Russel Wasendorf listed as being on the Futures Commission Merchant Advisory Committee.

Wed, 07/11/2012 - 14:07 | 2606832 DosZap
DosZap's picture

Check this out ... Wow.

Double damn right WOW...........great info.

Wed, 07/11/2012 - 12:35 | 2606461 Al Huxley
Al Huxley's picture

Yes, but as Izabella Kaminska so eloquently pointed out yesterday (to paraphrase) 'the only reason the price of gold is going up is because everybody wants to own it'.  So clearly, by this stellar bit of analysis, we're in a pretty serious bear market for gold, because the only thing supporting the price is individual and central bank demand.

Wed, 07/11/2012 - 14:12 | 2606856 DosZap
DosZap's picture

So clearly, by this stellar bit of analysis, we're in a pretty serious bear market for gold, because the only thing supporting the price is individual and central bank demand.

Evidently she is an air head,she needs to ask herself why, and also WHY every swinging soverign with a brain is increasing reserves as fast as they can get it.

Wed, 07/11/2012 - 12:39 | 2606476 Quinvarius
Quinvarius's picture

They already printed enough money and have enough bad debt to send gold well over 10k.  What the Fed does is only relevant to very short term traders.  This gold rally started in the dot com bust and continued with or without QE.  Gold is marching to a tune that no short term trader can comprehend because he needs a reason for everything "right now".  Gold's move is based on timeless market dogma.  Gold is the only real money by default.

Wed, 07/11/2012 - 15:03 | 2607151 DosZap
DosZap's picture

They already printed enough money and have enough bad debt to send gold well over 10k.

Yep, but two things as you know, one, the printed money is sitting in Banks,so it cannot inflate, and two,the market for PMs is 100% manipulated by the Fed,and the gub.

Otherwise Au would already be at your suggested levels.

Wed, 07/11/2012 - 12:42 | 2606486 JohnG
JohnG's picture

Chrysophilites Bitchez!!


(Had to look that one up....)

Wed, 07/11/2012 - 12:44 | 2606493 Mr_Wonderful
Mr_Wonderful's picture

Iran is shipping oil to China, its top buyer, despite a row over freight terms, and Japan has taken steps to resume imports in August as Tehran finds ways to get around Western sanctions on ship insurance for its drastically reduced shipments.

Wed, 07/11/2012 - 13:21 | 2606635 francis_sawyer
francis_sawyer's picture

Why doesn't China just build a pipeline straight thru Afghanistan to Iran?... Oh wait!

Wed, 07/11/2012 - 15:32 | 2607320 Mikehy
Mikehy's picture

you were implying mountain ranges are tough to build pipelines over?

Wed, 07/11/2012 - 12:48 | 2606508 lasvegaspersona
lasvegaspersona's picture

Most of the tuned in world is waiting for a reset. I refuse to read 120 pages about a 'bull market'.


Wed, 07/11/2012 - 12:49 | 2606512 OutLookingIn
OutLookingIn's picture

Inaction, uncertanty and fear are not the emotions of a euphoric, manic, parabolic gold bull.

The fundamentals just continue to grow stronger, for this gold bull to just keep forging ahead.


1/ Trust is fixed - financial/regulatory - a return to honesty and the rule of law.

2/ Markets free of intervention/manipulation

3/ Government of people, by people, for people - equitable wealth share

Until these three conditions are met, the gold bull will continue.

Do NOT follow this link or you will be banned from the site!