first majestic silver

How High Could Gold Go?

October 26, 2009

Not 'How High Will Gold Go?'. Nobody knows for sure. Anyone who says they know is a fool, has inside (illegal) information, or has a hidden agenda. The answer is not knowable as the future is uncertain. However, we can make inferences and educated guesses by looking at the past and surveying the present. After all, history tends to rhyme and there is nothing new under the sun.

I teach classes on sound money and the precious metals markets at local colleges. Fundamental questions asked by students include: Are we in a bull market in gold? Why a gold bull market now? How long will it last? And, How high could gold go? I'd like to take on the last of these questions in this piece.

The world is currently in the midst of a bull market in precious metals. Gold has been in a bull market in US$ terms since at least 2001 (as has silver). Even better, this bull has not been limited to the U.S., but is present in all major world currencies, and seems likely to continue for some time. The reasons are manifold: Currency debasement, Economic uncertainty, Decreased mine supply, Central Bank net buying, Geopolitical concerns. One could write a book, really.

Before we get to the question posed in the title, there are a couple truths the seeker needs to understand. First, Gold is money. It has been throughout recorded history. It's desired. It's hoarded. It's flaunted. It's locked away for safe keeping. All know it has value intuitively and few part with theirs easily. Some of the richest, most powerful, and well connected people on earth are Central Bankers. What do they keep in their vaults? Gold (and some silver for a few). Why? Because they know the value of gold and that it is money. They don't keep rocks, or pigs, or wheat, or plutonium, or oil in there, do they? Though each of these has its own value and utility, none is the best form of money. Gold is.

Second, Fiat Currencies (all of them) are the anti-gold. Gold is the anti-dollar, and the anti-Euro, and the Anti-Yuan, etc. It is in direct competition with currency. It's truly the canary in the coal mine. Only this canary gets larger and stronger as the currencies debase (read: inflate and die). Holding gold is a hedge against a falling dollar via inflation of the money supply. Thus, the dollar and gold are highly negatively correlated. When the dollar moves down, gold is normally up and vice versa. The dollar has been in a down trending market since the turn of the century. With dollars being created far in excess of expanding productivity and population, this trend seems likely to continue as each dollar created in excess degrades each existing dollar.

In a true gold or bi-metallic standard, each unit of currency would be backed and convertible directly by and to a unit of metal. Mike Rozeff calls this the 'Zero Discount Value (ZDV)' of gold and defines it as 'the total number of currency notes issued divided by the total number of ounces of gold held as an asset against that note issue.' That's not what we have today. One also needs to be able to convert those notes to specie upon demand. So, if one accepts the above, that the money supply should be backed by a tangible asset, and that the best fit in this role is and has been gold, then one can more readily discern and accept the numbers below.

All of the following prognostications have been published in the last half year or so. Some are a forecast of where the analyst thinks gold will top at the conclusion of this bull market and some are only theoretical constructs. Even so, all are good for rumination. Our first stop is at $875, which was the January 1980 all-time intra-day high ($850 close), which ended the great 1970's bull market. That number's no longer a candidate as it's in the rear view mirror. Our next candidate is the government's CPI Inflation Adjusted number needed to equal the 1980 high. That number is currently in the $2300 range plus or minus change. In effect, we'd need a doubling of today's price to get there. But it's a moving target. To approach that number will take some time. By the time we get there, that number will likely have increased. Arriving at $5246 as we climb the price ladder, this number comes to us by way of Jeff Clark at Casey Research. His number is calculated by dividing World Central Bank Reserves of $4.8 trillion by World Central Bank Gold Reserves of 929.6 million ounces. The National Inflation Association suggests a possible price of $5400 if gold and the DOW met at the median of their current values (at that time). DOW 9800 and gold 1000. Add and divide by 2. Thorsten Polleit figures that it will take $6000 gold to back the U.S. M0 (m zero) money supply with gold. M0 is the narrowest definition of the nation's money supply and consists of banknotes and coins in circulation. It is only a small percentage of the total money supply. If we get the same percentage rise in gold as we did in the 1970's bull market, the price would have to reach $6375. From a low of $35 to the $875 high is a 25 fold increase. Using $255 as the low and multiplying by 25 attains this number. According to John Williams at Shadowstats, The price of gold would need to get to $7000 to reach its inflation adjusted high using the methodology for calculating inflation that was used during the 1970s. Alf Field believes gold won't enter a bear market until it trades for $10,000 per ounce. Jim Sinclair is on record predicting a price twice as lofty at $20,000 per ounce. Since Jim is on record as predicting the previous golden bull would reach $900 years before the actual $875 high, one may want to pay close attention to his current forecast. It's also said that Mr. Sinclair's firm was the seller at the last top. Recently, Jason Hommel over at Silverstockreport posted an interesting article concluding that it would take $28,500 per ounce of gold if we had to pay for oil with gold. Here are his calculations. I ran the numbers earlier this year, in March. At $40/barrel, the world spends $1.2 trillion, or $1,200 billion, on oil per year. Oil is now $71/barrel. So $1.2 x 71/40 = $2.3 trillion spent on oil per year now. Gold is now $1055/oz., which, at 80 million oz., is $85 billion on gold per year. Thus, if all the world's new annual oil production was sold for all the world's new annual gold production, gold prices would have to rise by a factor of 2,300/85 which equals 27 times, or 27 x $1055 which implies a gold price of $28,500 per oz. Getting back to Thorsten Polleit, he figures a gold price of $31,000 is needed to back M2 with gold. M2 is basically M0 plus Checking Accounts and Term Deposits. It's a broader measure of the money supply than either M0 or M1. Jeff Clark again, over at Casey Research, sees a price of $31,822 to back all U.S. Foreign Debt with U.S. gold. $9.13 trillion divided by 286 million ounces (U.S. Official Gold Reserves). More provocative, he surmises a gold price of $192,401 per ounce is needed to back all U.S. Liabilities (GAO number) by U.S. gold.

Finally, perhaps the most obvious number is Infinity, as the dollar goes to zero. There's just one problem though. Nobody gives, nor can reasonably give, an accurate time forecast. In my next piece, I'll discuss various signs of an approaching top as these numbers come to fruition.


About the author: Mr. Western teaches classes about sound money and the silver and gold markets. He's available for hire to speak to your organization. He can be reached at [email protected] or [email protected].


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