Gold price targets suffer from incompleteness. Lack of perspective, obsession with the current price, false assumptions, and inside-the-box thinking run rampant. For these reasons, my assessment that gold can reach six thousand dollars per ounce by 2018 is not preposterous.
The target is a simple “back of the envelope” estimate for a long-term bull market in anything. I and many others use the multiplication factor method. For example, Mr. Jeff Clark: "In the 1970s gold 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." While further analysis could refine that number, it is a good first cut.
Of course, price without time does not help the investor to make an informed decision. For example, I predict that the Dow will hit 100,000. That's one hundred thousand, ten times what the level is now. So what? So when? If it happens eventually, say in 50 years, what do I care? In the long run, we'll all be dead. Dow 100,000 in 2059 is only 5% per year compounded, by the way. Therefore, admitting the possibility that gold will reach 6,000 US dollars per ounce by itself is not useful. There needs to be something more.
Taking the $6,000 range limit one step further requires extrapolating another parallel. Let’s assume that the last two secular bull markets in precious metals rhyme in time as well as price. The current one began in 2001. Commonly the last secular bull market in gold is marked from 1971 to 1980. However, this timeframe is wrong. Prior to 1971, the US government artificially fixed the price of gold. We can look gold's sister metal, silver, to determine true start date [reword]. 1964 was the last year that the US minted 90% silver coins for circulation. That year the decision was made to debase dimes, quarters, and half dollars minted the following year. By 1971, no coins minted for circulation had silver content. Thus the previous secular bull market in precious metals ran 16 years, from 1964 to 1980. The epochal event, the trashing of the gold standard, occurred 7 years into the uptrend. The epochal event this time around, this year's magical creation of electronic dollars by the US Federal Reserve, occurred 8 years into the uptrend. Taking the parallel one step further, closely matching timeframes imply that the current secular bull market in precious metals could easily run another 8 or 9 years, all the way to 2018! Occasional volatility will shake out the “weak knee” investors. Nevertheless, the dollar gold price has time to run.
The deflation timer in the USA is ticking towards zero. The Fed's foray into money printing, euphemistically known as "quantitative easing," abandons prudence as badly as money printing in Zimbabwe. Only the mechanisms are different. In high tech USA, computers are used to print money; in low tech Zimbabwe, paper printing presses debase the currency. The first few episodes of currency debasement reap tremendous rewards for the authorities. Like a drug, a few leads to more, then finally a meltdown. The dollar contains risk of a cascading fall like the global stock markets in 2008. American consumers kept on bending until they broke, or went broke. Like them, the Federal Reserve, with cooperation from Congress and the US Treasury, will bend the value of the dollar until it breaks.
There are long-term deflationists out there who have legitimate reasons for a decline in the dollar gold price from here. Indeed, if the powers that be all come to the agreement that the dollar must be defended at the risk of high interest rates and another free-fall recession, gold will hit six hundred before six thousand. I don't believe any of these institutions has the fortitude to forestall a massive dollar devaluation.
The fact that Japan perpetrated quantitative easing without engendering a currency crisis will not help the USA. Japan still is a nation of savers, collectively the buyer of last resort for both yen and government bonds. Also, Japan consistently ran a trade surplus to acquire foreign currencies if needed to support their own. The USA is acting more like an irresponsible banana republic than a “lost decade” Japan. Once the export nations grow frustrated enough to stop buying US dollars, there will be no more buyers. The year 2009 will be looked back on as we now look back on 1971, the year the USA went off the gold standard.
I see too many false assertions by recent analysts. Gold bears point out that jewelry demand, equal to two-thirds of annual gold production, will stop if the price rises too much from the current price. That won’t matter. In the event of dollar devaluation, jewelry demand could go to zero as fearful global investment demand dwarfs all other demand and overwhelms relatively small gold production and stockpiles as well. Also, the idea that gold has no intrinsic value is ridiculous. In fact, not even counting its valuable industrial uses, gold has been the only durable store of wealth since the dawn of civilization.
Situational awareness means readiness to make money. The astute investor needs to estimate the possibilities in time as well as price so as not to get overly endeared to the current time and price. When gold rises toward two grand per ounce, you should not think the price is too high. Just don't hold onto your gold like those die hard gold bugs who still have the bullion they bought in 1980. There will be opportunities to sell gold positions within the next decade. When gold gets closer to six grand per ounce than one, I will look for the trade to be over.
Copyright © 2009 Chuck DiFalco
