Why this bull market in gold won't peak at $2,000 an ounce...
GOLD IS NOT just going to $2,000 an ounce in this bull market writes Jeff Clark, editor of Casey Research's Big Gold letter.
We're now about eight years into the bull market, and gold has breached the $1,000 level twice and has spent weeks trading above the old high of $850. Some observers are now saying that gold's bull market has pretty much had its day, and that once the recession is over, the Gold Price will retreat for good.
However, the four-digit gold price we've seen so far since this bull market began (first in March '08 and then Feb. '09) came with no price inflation to speak of, no effects of the atrocious increase in the money supply, and despite a rising Dollar. What happens to gold when each of those pictures gets turned upside down – high inflation, excess cash jolting the economy, and a falling Dollar? After all, gold's peak level so far this year was powered only by general anxiety, not by any visible erosion in the Dollar's value.
I decided to take a fresh look at calculations that could be used to appraise gold's upside potential. No single idea, by itself, comes with compelling logic. But they all point in the same direction.
Gold's Gains During Its Last Bull Market
What if gold in this bull market repeats the percentage rise of the last bull market? During the 1970s, Gold Prices rose from $35 to $850, a factor of 24.28. Our low in 2001 was $255.95. Multiply that by 24.28 and you get a gold price of $6,214 per ounce.
US Gold Holdings to Money Supply
The M1 money supply consists of currency and checkable deposits. The US government currently holds 286.9 million ounces of gold. If the government were to make each Dollar redeemable by the amount of gold it possesses, we'd arrive at the following price for gold of $5,468.80 per ounce ($1.569 trillion ÷ 286.9 million oz).
The Dow/Gold Ratio
Pricing the Dow Jones Industrial Average in gold ounces, the Dow/Gold Ratio stood at "1" when gold peaked in 1980, meaning the Dow and gold were the same price. To restore that relationship at today's stock prices would mean that when the Dow is at 8,400 we should see the Gold Price at $8,400 an ounce.
Of course, we think it likely that the Dow will get a lot lower before gold peaks. But even if it drops all the way to 4,000, that would imply a Gold Price of $4,000.
All the Money in the World vs. Gold Reserves
As this bull market in gold develops, the public may eventually see the paper game being run by the world's central banks for what it is, and governments will be forced to back their currencies with gold (and perhaps other tangibles like silver). Assuming they had to go into the market and Buy Gold to restore faith in their currencies, the numbers might look like this:
Total central banks reserves (including gold holdings) = $4.8 trillion
Total gold reserves held by all currency-issuing institutions = 929.6 million ounces
Gold Price = $5,246 an ounce
US Gold Holdings to US Foreign Trade Deficit
Bull market or not, if all currencies were convertible into a fixed amount of gold then the size of a country's deficit or surplus would be of no consequence to the market. However, the Dollar is increasingly considered a hot potato, and when the trade balance reverses – as it must – Dollars will flow back to the US and fuel domestic price inflation.
Based on the cumulative trade deficit of $9.13 trillion (up from $6 trillion since June '07) plus US gold holdings of 286.9 million ounces, the corresponding Gold Price would be $31,822 per ounce.
US Gold to US Government Liabilities
Finally, the Government Accountability Office (GAO) calculates an income statement and balance sheet for the US government. As you'd suspect, it is dominated by future liabilities for Medicare and Social Security. What if they had to be backed by the supply of gold?
Official US government liabilities now ring in at an incredible $55.2 trillion. To make good on that would require a $192,401 an ounce Gold Price.
Now, please don't imagine that we believe gold will hit $192,000 or even $32,000. And there really isn't any surefire way to forecast the eventual high. But it is clear amid the current bull market that every weathervane is pointing in the same direction.
So, yes, gold isn't going to $2,000 an ounce. It's going higher.
Today our world, essentially, is on fire. High unemployment has become a worldwide epidemic, with the infection spreading. Eastern Europe borders on bankruptcy. Brazil's economy is falling off a cliff. Ditto Mexico. Protests have erupted in Latvia, Chile, Greece, Bulgaria, Iceland, Dublin, and parts of the US. Workers have gone on strike in Britain and France. The central bank of Ukraine has banned early redemption of term deposits, the most popular form of savings, and bank deposits have dropped 20% since September as cash savers dodge the risk of getting locked in.
Here in the domestic United States, 36 states and the District of Columbia have proposed or implemented reductions in the civil workforce. (You think customer service is poor now...) An astounding one in nine homes, 14 million, sits empty. The December median price of a home sold in Detroit was $7,500. More than 8.3 million homeowners were upside down on their mortgage in the fourth quarter. Freddie Mac's new CEO resigned after six months on the job.
Last quarter, 12 US banks failed, bringing the 2008 total to 25, the highest one-year death rate since 50 failed in 1993. More foreboding, another 252 banks joined the FDIC's "problem list." So far this year, 19 banks have failed.
Big picture, the projected $1.75 trillion federal budget deficit is almost four times the nation's previous record-high budget deficit. The Times Square debt clock reads over $11 trillion, with Japan chasing hard at a record $7.8 trillion government deficit.
With world economies taking it on the chin, it's little wonder that investor interest in gold as a safe haven is growing – a trend we expect to continue. And just wait until the Dollar resumes its slide, the expanding money supply jolts the real economy, and inflation kicks in.