The price index of gold ores in June 2009

Previously, we have demonstrated that gold ores price can be predicted at a several year horizon[1]. The prediction was based on the observation that the difference between the overall producer price index, PPI, and the producer index for gold ores shows sustainable trends. A new trend has been emerging since 2008 and the difference can be foreseen at a five to ten-year horizon. As the PPI will be likely constant over the next decade, the difference provides a direct prediction of the price index for gold ores. In this article, we update the forecast using a new reading of the PPI for June 2009.

Currently, we are struggling through a period of high volatility in all macroeconomic variables including the difference between various PPI subcategories and commodities. Figure 1 illustrates the observation that this volatile period is related to the turn to a new trend in the difference after 2008. We have made a naïve assumption about the new trend shown by green line - it should repeat the trend observed between 2001 and 2008 but with an opposite sign. Actual trend may be different but inevitably with a positive slope. The green line has a positive slope. Therefore the index for gold ores will be growing at a lower rate than the overall PPI. According to our assumption, the rate of the deviation from the PPI will be +11 units of index per year.

Figure 1. Evolution of the difference between the PPI and the price index for gold ores between July 1985 and June 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.

We will continue reporting on the long-term prediction, i.e. on the evolution of the difference between the PPI and the index for gold ores. This is an ongoing task which does not need monthly updating. However, it is of interest to look into the short-term behavior of the difference and evaluate the index for gold ores at a several months horizon, as we reported for crude petroleum.
Figure 2 displays the trajectory of the difference since 2005. A characteristic feature is the presence of low-amplitude and high-frequency (monthly) oscillations in the curve since 2006. Bearing in mind the absence of such oscillation if the difference between the PPI and the index of crude petroleum mentioned above, the cause of the oscillations is not clear. In any case, this is a feature, which should be taken into account when predicting gold ores price at time horizons of several months. The reading for June supports the importance of the high-frequency oscillations – the curve, which was expected to go upwards to intersect the new trend in 2009, suffers a local decline. It would be an unusual behavior for the index of crude oil, but it is normal for the index of gold ores.
Despite many local deviations in the past, the curve always returned to the trends. Therefore, the larger is the deviation the bigger should be a countermovement. Accordingly, one can expect that the index for gold ores will soon accelerate to the new trend shown by red line in Figure 2. In other words, the increase in gold price in May and June (and likely in July) should be compensated by an opposite move of the curve to the level above the red trend line. As a result, the index price should fall by ~50 units, i.e. to the level between 180 and 2000, which was observed between April 2006 and August 2007.
Apparently, the prediction is based on the assumption of a natural (in physical sense) behavior of the difference, as has been observed since 1985. The forces behind such behavior are prone to secular changes and there is a non-zero probability that the new trend will never emerge. In any case, we are going to continue reporting on the evolution of the difference.
Figure 2. Evolution of the difference between the PPI and the price index for gold ores between January 2005 and June 2009. Red line predicts the evolution of the difference after 2008. Red circles represent the difference between April and June 2009. We expect the difference will start growing in July-August 2009.

[1] Kitov, I., (2009). Predicting gold ores price, MPRA Paper 15873, University Library of Munich, Germany, http://mpra.ub.uni-muenchen.de/15873/01/MPRA_paper_15873.pdf

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