Gold isn't going to $2,000
Jeff Clark, Editor, BIG
Casey Research snippet
May 4, 2009
Gold isn't going to $2,000
Before you gag on your coffee
or suffer chest pains, allow me to explain.
We're 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 pretty much had its day
and that once the recession is over, it will retreat for good.
However, the four-digit gold
price we've seen so far is 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 performance to date has been powered
only by general anxiety, not by any visible erosion in the dollar's
I decided to take a fresh look
at calculations that could be used to appraise gold's upside
potential. No one of them, by itself, comes with compelling logic.
But they all point in the same direction.
Gold's Percentage Rise in
the Last Bull Market.
What if gold in this bull market repeats the percentage rise
in the last bull market? 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.
U.S. Gold Holdings to Money
Supply: The M1 money
supply consists of currency and checkable deposits. The U.S.
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: $1.569 trillion ÷ 286.9 million oz. = $5,468.80
Gold/Dow Ratio: The ratio was about "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 when the Dow is at 6,626, gold should be at $6,626/oz.
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/oz.
All the Money in the World
vs. Gold Reserves:
If the public eventually sees the paper game being run by the
central banks for what it is, 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 the
gold needed to restore faith in their currencies, the numbers
might look like this: Total central banks reserves (including
gold holdings) = $4.8 trillion, divided by 929.6 million ounces
total gold reserves held by all official institutions that issue
currency = $5,246 gold price.
U.S. Gold Holdings to U.S. Foreign Trade Deficit:
The size of a country's deficit or surplus would be of no consequence
if all currencies were convertible into a fixed amount of gold.
However, the dollar is increasingly considered a hot potato,
and when the trade balance reverses, as it must, dollars will
flow back to the U.S. and fuel domestic price inflation. Based
on the cumulative trade deficit of $9.13 trillion (up from $6
trillion since June '07!) and U.S. gold holdings of 286.9 million
ounces, the corresponding price of gold would be $31,822 per
U.S. Gold to U.S. Government
the GAO (Government Accountability Office) calculates an income
statement and balance sheet for the U.S. 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 U.S. government liabilities now ring in at
an incredible $55.2 trillion. To make good on that would require
a $192,401 gold price.
No, we don't think gold will
hit $192,000 or even $32,000. And there really isn't any surefire
way to forecast the eventual high. But it's clear that every
weathervane is pointing in the same direction. So, yes, gold
isn't going to $2,000; it's going higher.
Witness the Breakdown
When determining how to keep
your wealth safe, the state of global affairs can be a powerful
reminder that gold should be part of the strategy. And today
our world, essentially, is on fire.
- 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 U.S.
Workers have gone on strike in Britain and France.
- In the U.S., 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 in the U.S. 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 U.S. 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.
- The central bank of Ukraine
banned the early redemption of term deposits, the most popular
form of savings in the country. Bank deposits have dropped 20%
since September, as bank customers dodge the risk of getting
- The projected US$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. Japan's now reads $7.8 trillion.
- High unemployment has become
a worldwide epidemic, with the infection spreading.
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.
Both Hands on the Wheel
Given the ongoing turmoil and
the swallowing darkness at the end of the crumbling economic
tunnel, our recommended BIG
GOLD strategy remains keeping one-third in cash, one-third
in physical gold, and one-third in our selected gold stocks.
New money for investment should be split among the same three
categories; we just don't see any safer places to be.
As economies around the world
continue to shrink and governments continue administering larger
doses of the wrong medicine, we'll sit in relative comfort with
our gold for protection and our stocks for profit. We expect
the prices of both to rise as others join us.
Even though some of the mainstream
media are already popping the champagne, cheerfully pronouncing
the end of the crisis, we beg to differ. The economic quagmire
the U.S. and much of the developed world is in is far from over
so be right and sit tight, as we at Casey Research like to say.
And find out how you can make the most out of gold as a safe-haven
investment, by clicking