Gold or Nickel?

Post Number 9: Gold or Nickel?

I attended a meeting of an investment club a few days ago. The attendees were not professional traders, and the presenters were pretty much of the "I predicted the crash of '08 and I'm predicting it again" sort. In a room of true believers like this, there was one question on most minds: When do I buy gold and silver? Actually there were two questions; the other was: when will I make back my losses on gold and silver?

I added my two cents to the discussion saying that there were better hard assets to invest in than gold. I didn't have my charts with me, so it was mostly a qualitative statement that some things are cheap and other are dear. I promised to put up some charts on this site. So here are two.

First, lets talk about a metal that really is a good value, nickel. Here's a chart of forward ten year returns versus constant dollar price. BTW this chart is explained in detail in Post 2.

Like most of my charts it is done on a ratio (log) scale to better show the percentage changes. The red line is where we are now. So the model is forecasting that nickel will more than double in ten years. That's in constant dollar terms. If you believe there will be some inflation (most of those at the meeting certainly did) then it will do even better. BTW, the model has an R squared of 67%. That's great for a long term forecast.

Experienced commodities traders will counter with: The fundamentals are terrible. China is slowing, and there is no other buyer to take its place. Production is only slowly being cut back, and there are going to be surpluses for awhile. All of this is true, but remember that this is a ten year forecast. In the past, ten years has been long enough to work the surplus out. In terms of trading, I plan on waiting for some kind of trend reversal signal, probably based on moving averages.

Now here's the same plot for silver:

The fit is not as good at the low end of the price. That is because the series goes back to the time of the Hunts and the associated craziness. Since the mid 80s the fit is much better. It's forecasting a (50%) decline in the real price. It will take an awful lot of inflation to make up for that.