How to Predict the Future of Gold Without Time Travel

by Ken Wangdong

What is the one way to invest in the stock market that has zero risk?

What is the one way to invest in the stock market that will give you certain wins?

That’s right, time travel!

It has happened…in a movie.

The movie is Primer.

I took this right out of Rotten Tomatoes:

‘Primer is a psychological sci-fi thriller about a group of four tech entrepreneurs. Toiling away in a garage, the quartet has successfully created error-checking systems for their clients. But their recent work seems to have created an unexpected and seemingly impossible side-effect.

‘Suddenly, two members of the group realize they are in possession of a device that can double, or perhaps even quadruple, the space-time continuum of anything that enters it. What at first seems like a windfall of astronomical proportions eventually proves to be much more than they bargained for, as the duo attempt to manipulate time to their financial — and emotional — benefit.’

So, how would this work if you could apply the ‘Primer’ world to the stock market?

Equity investment through a time machine

Basically, you have a time machine that can take you back in time. Let’s assume you can go back six hours.

You start the day by checking the market. You write down the stocks that make the biggest gains.

At the end of the day, you use the time machine to go back to the beginning of the day.

You appear at the beginning of the day. You are now in existence with your original on the same ‘timeline’ or universe.

You make your trade and make a fortune (while avoiding running into your original).

Your original goes into the time machine at the end of the six hours (while you stay somewhere else to avoid your original).

They go back in time, and leave you as the only one existing in your timeline.

You repeat the process and continue to make more money.

Of course, don’t get carried away with time travelling.

The slightest change in the past, if not ‘managed properly’ will change the future in ways you can’t imagine.

You don’t need me to tell you that it is about the properties of quantum particles and the 11 dimensions of the multiverse.

But let’s not get into that!

Building your own time machine

Is it possible to create your own time machine?

No, it’s not possible, at least not in a physical sense in this day and age.

However, it is possible to employ studies of the past and build models to predict the future. This prediction is by no means perfect. However, it can be accurate enough to be useful.

You should be familiar with the idea of megatrends. Megatrends are trends that stretch over a long period of time, decades or even centuries.

There are also other types of trends. The most relevant are short term trends and structural trends.

Short term trends may last for just a few months. Structural trends may last over a year or several years. And sometimes even longer.

These two types of trends can co-exist and show different signals.

This means you can lose in the short term but win in the longer term. You can also win in the short term but lose in the long term.

Let’s see a few examples.

Above is the short term valuation for gold.

Between the fourth quarter of 2012 and second quarter of 2013, gold went through a structural adjustment. The sharp fall in the gold price rendered this short term valuation model useless.

Although valuation metrics continued to point to undervaluation in the gold price, the price just kept on dropping. Eventually, the valuation began to work properly again in the third quarter of 2013, until now.

Normally, overvaluation leads to a fall and undervaluation leads to a gain in price, unless it’s in a structural adjustment.

So, how do you find out if something is structurally mispriced? Or simply what the structural trend is?

The above chart is a model on the structural valuation of gold.

The actual valuation functions more as an indication of the future direction of price than a calculable figure.

The model has been pretty good in predicting the big movements in gold prices over the decades.

Before the collapse in the gold price in the fourth quarter of 2012, the market had been overvaluing gold for some time.

Gold spent much of the Global Financial Crisis (GFC) in overvaluation territory. During the GFC, there was a run to safety. And a lot of money ran to gold.

There was excessive liquidity and an absence of a solid recovery.

Of course eventually, the gold party had to end. And in the fourth quarter of 2012 it did. This was a great thing if you had shorted gold. If you had been long on gold before that, it would have been a perfect ‘hedge fund’ move. (Time machine, anyone?)

There is a lot of talk on the return of gold these days. But the truth is it’s still slightly overvalued, so it could have further to fall.

Will gold rally again? For sure it will.

The timing however, will need to wait a little longer.

It will very possibly be triggered by an inflationary effect from excessive capital in the world, or inflation as a result of commodity prices recovering. Gold is a hedge against inflation, so it should rise in price when inflation picks up.

To predict precisely when, you would need to get your hands on that time machine.

Ken Wangdong+,
Emerging Markets Analyst, New Frontier Investor

Ed note: The above article is an edited extract from New Frontier Investor.

Read the rest of this article at Money Morning