When people ask me, “How high will the price of gold rise?” I like to tell them that is really not the question they should be asking. What they should be asking is, “How much will an ounce of gold buy?” The answer they should expect, because it has proven to be true over many centuries, is that it is likely to buy as much tomorrow as it does today, as it did 100 years ago. That is true because the supply of gold is relatively constant even if more or less gold is mined in any given year. And that is true because virtually all the gold ever mined still exists in aboveground hoards so that the supply of newly mined gold in any one year is largely irrelevant, relative to its total supply.
That said, there is bound to be volatility in the price of gold during shorter periods of time because the confidence people feel with regard to fiat money varies greatly. Since we began calculating our Inflation/Deflation Watch (IDW), the price of gold has risen significantly, vis-à-vis a variety of items indicating a loss of confidence in paper money. In other words, as confidence is lost in the banking system and thus the dollar, we are seeing gold rise relative to most items including most, though not all, commodities.
Gold to Commodities (The Rogers Raw Materials Index) – As can be seen in the chart below, gold has risen dramatically since January 2005, relative to a broad basket of commodities in the Rogers Raw Materials Index.
On January 31, 2005, the ratio of gold to Rogers was 0.1478. It rose 36.8% to 0.2023 before falling to its current ratio of 0.1828 with gold’s recent plunge from over $1,000 to the low $900’s.
Gold/ Commodities
Ounces of Gold to Buy the Rogers Fund
Gold/Oil Ratio (Light Sweet Crude)
The price of oil has risen to over $108.81 as of April 8, from $59.30 on
July 18, 2005, the date we added oil to our IDW. That’s an 83% rise in the price of light sweet crude, but gold has risen by 119%, from $418.35 to $916.10 during that timeframe. Hence the gold-to-oil ratio has risen from
7.05 on July 18, 2005, to 8.42 on April 8, 2008. That’s a 19% gain for gold over oil since we first started tracking our IDW. When gold peaked at over $1,000, the ratio had risen to a weekend high of 10.21.
Ratio of Gold Price to Oil Price
Gold to the S&P 500 – What about gold compared to the paper products Wall Street really wants to sell you because that is where they make their highest profits, namely, stocks. The chart below tells the story. Gold has
more than doubled in value, vis-à-vis Abby Joseph Cohen’s favorite investment, the S&P 500. On January 31, 2005, the date we started charting our IDW, the ratio of gold to the S&P 500 was 0.36. As of April 8, 2008, it was 0.67, after hitting a high in March of 0.78. In other words, just since January 2005 when we started our IDW, the value of gold has more than doubled the value of U.S. stocks as measured by the S&P 500.
A Sign of Inflation, Gold Lags Copper and Silver
Copper is often referred to as Dr. Copper because it has been so good at diagnosing the future of the global economy. If copper prices are on the rise, it is usually indicative of economic growth or perhaps a combination
of a copper shortage during a period of stable to rising demand. Simply put, if copper is trading near its all-time high, it is very difficult to conclude that deflationary forces are dominating. If copper prices are rising relative to
gold, we view that as an inflationary symptom. On January 31, 2005, the price of copper was $1.49 per pound. Since then it has
risen 165%, to $3.95 per pound.
Meanwhile, gold has risen by 118.1%, to $916.10. In other words, strong as gold has been, the primary metallic barometer of global industrial demand—copper—has been much, much stronger. We strongly agree that deflationary
pressures from excessive credit creation are huge. But copper is suggesting the global economy is growing and growing very, very rapidly. This suggests strong inflationary underpinnings in our global economy.
Silver certainly isn’t as important as copper in terms of its industrial usage. However, silver is unique with respect to gold, because it derives
much of its value from its demand as an industrial metal, whereas
gold derives most of its value, by far, as a monetary metal. Silver is
unique with respect to copper, because unlike copper, which is
not at all a monetary metal, it also derives some of its value from its
use as a monetary store of value.
Because of its mix as both a monetary metal and as an industrial metal, we consider relationship between silver and gold to be a symptom of either inflationary or deflationary pressures. If the price of silver is rising relative to gold, we see that as a symptom of inflationary pressures. If the price of gold is rising vis-à-vis silver, we see that as a deflationary symptom. On January 31, 2008, one ounce of gold would have bought 59.33 ounces of silver. As of April 8, 2008, one ounce of gold buys just 51.82 ounces of silver. Therefore, as is true with copper, we see the rising value of silver relative to gold as an inflationary symptom.
We believe these are some of the more significant relationships in our IDW that suggest inflationary pressures are on the rise. To be sure, there are powerful deflationary forces that serve to confuse the dominant theme. That confusion of course serves the establishment well, because as von Mises has observed, the authorities can continue to inflate as long as the populace believes it will end. If the population thinks in the aggregate that
inflation will never end and, worse yet, if it feels it is accelerating, there will be a massive exit out of paper and into tangible assets that hold intrinsic value, unlike paper, which is completely worthless.
April 13, 2008
Jay TaylorEditor of J Taylor's Gold & Technology Stocks
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