Gold & Silver Fear Indexes

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Gold & Silver Fear Indexes

Chris Waltzek

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Thursday, August 16th

Current Gold Fear Index (GFI)

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 below, clearly the gold market mania phase is only beginning, when compared to the 1980's peak:

(Courtesy of GoldMoney.com)

Formula (click links for data sources):

GFI = Total US Gold Reserve Oz. * Gold Price / M3 =

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 = Total US Gold Reserve Oz. * Gold Price / M3 =

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 = Total US Gold Reserve Oz. * Gold Price / M3 =

GFI = 261,500,000 * $7,000 / 20,000,000,000,000 = 9%

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NEW: Current Silver Fear Index (SFI)

Formula (click links for data sources):

Next 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 how undervalued is silver, relative to the 1980's peak?

SFI = 1980 Total Silver Market Balance Oz. * Silver Price / M3 =

SFI = 210,000,000 * $50 / 1,935,100,000,000 = .54%

SFI = 2012 Total Silver Market Balance Oz. * Silver Price / M3 =

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 calculateion is substituted into the 2012 equation below:

SFI = 2012 Total Silver Market Balance Oz. * Silver Price / M3 =

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

SFI = $Silver = $398.25

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).