©Gold
& Silver Fear Indexes
Current
Gold Fear Index (GFI)
August
16, 2012
Chris
G. Waltzek
A
discussion
with James Turk this week renewed my interest in
his Fear Index. So I decided to calculate the current
figure. Given the 2.8% GFI figure listed in the equation
above, clearly the gold market mania phase is only beginning,
when compared to the 1980's peak:
 (Courtesy
of GoldMoney.com)
GFI
Formula (click
links for data sources):
GFI
= 261,500,000 * $1,600 / 14,750,000,000,000 = 2.8%
Next
we use the formula to extrapolate a gold price forecast.
The chart shows the Fear Index apogee of roughly 9% in
1980. So we plug in a new gold price of $5,000 which results
in 9% GFI reading.
GFI
= 261,500,000 * $5,000 / 14,750,000,000,000
= 9%
Thus
according to the GFI, the fair value for gold is $5,000.
Keep in mind that the gold price forecast moves higher
as the M3 money supply figure increases. For instance,
if we assume the M3 climbs to the number listed below,
in accordance with expectations, gold could soar above
$5,000, to $7,000:
GFI
= 261,500,000 * $7,000 /
20,000,000,000,000 = 9%
NEW:
Current Silver Fear Index (SFI)
Updated: September
13, 2012
Formula
(click links for data sources):
The
GFI index can be used to determine the fair value of silver,
by simply using the gold/silver ratio. Assuming a GFI figure
of $5,000 and a gold/silver ratio of 50, the expected silver
price is: $5,000 / 50 = $100. However, to derive a more
accurate silver estimation, we apply the GFI formula to
the silver market, resulting with a new indicator: the silver
fear index (SFI). Since the government has sold off the
strategic silver stockpile, all three billion ounces and
the US Mint must purchase silver from the free market, the
silver market balance figures produced by the CPM
Group are used. This figure represents the annual silver
inventories. First we calculate the SFI for the 1980's peak
price of $50 to use as a base for common size measurement:
.54%. Next we calculate the current SFI: .04%.
Clearly the silver price is EXTREMELY undervalued relative
to 1980. But precisely how undervalued is silver, relative
to the 1980's peak?
SFI
= 210,000,000 * $50 / 1,935,100,000,000 = .54%
SFI
= 200,000,000 * $30 / 14,750,000,000,000 = .04%
To
determine how undervalued silver is today relative
to the previous bull market peak price, the .54%
SFI number from the 1980 calculation is substituted
into the 2012 equation:
SFI
= 200,000,000 * $Silver? / 14,750,000,000,000
= .54%
SFI
= 200,000,000 * $Silver? = .54%
*14,750,000,000,000
SFI
= 200,000,000 * $Silver? = 79650000000
SFI
= $Silver? = 79650000000
/ 200,000,000
NEW:
Therefore,
the SFI indicates that silver must climb to nearly
$400 in order to reach it's current fair value.
Anecdotally, this is precisely the silver target
I proposed in Wealth Building Strategies (2010).
Nevertheless, the $400 price is likely overstated
due to the fact that gold has not been included
in the calculations. Next the GFI and SFI indexes
are combined and adjusted by gold relative to silver
(50 = 49/50 = .98) and silver relative to gold (1/50
= .02) resulting with a current silver estimate:
Silver
FV = GFI ($5,000) + SFI
($398) = $5,398 * Silver:Gold (1/50) =
$108
Gold
FV = GFI ($5,000) + SFI
($398) = $5,398 * Gold:Silver(49/50) =
$5290
So
investors should expect silver to climb to $108
and gold to $5,398
per ounce. Although the numbers listed above
are close approximations, for a more accurate calculation
of the gold and silver fair value estimates, the
GFI and SFI formulas must be combined within the
original M3 money supply computation. This article
is dynamic - the formulas will be updated after
this semester is over. Please click this link for
the Housing Fear Index (HFI): click
here.
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