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$5,000 or $50,000 Gold? Let the numbers speak!

Paul Farrugia
Posted Dec 2, 2017

Q: I’ve been reading a lot lately, actually for a number of years now, that gold is going to go to $25,000, some say $50,000, and the odd person even said $100,000. Do you think any of these price targets are reasonable?

A: It sounds enticing, gold going to $50,000/oz., even $100,000/oz. You could make 20-75 times on your money. The reality is, how likely is it that gold will reach $100,000/oz. in this cycle? How many times has gold appreciated from the low to the high by more than 90X? Having been a professional analyst working with multiple award winning portfolio managers, scenarios are important to understanding the possibilities of any investment, before entering the position. Do these people giving these price targets give a scenario as to what happened in the past? Many times they don’t. It’s not as helpful because history repeats, but it is not precisely the same, because the characters are different, with the storyline following the familiar ups and downs from past cycles.

Which currency are you priced in?

Depending on which is your home currency that you are valuing gold in, it will be most impactful to your returns. Many investors typically only calculate gains or losses in the local currency of the investment made. I have seen over the years, that often, the currency can account for a significant portion of gains or losses of the overseas investment. Over the past 5 years, Gold is down 25.02% in USD terms, yet in Australian Dollar (+2.92%), Russian Ruble (+42.13%), Mexican Peso (+7.64%). We will look further how gold has performed in US dollar terms below.

(Click on images to enlarge)

What does history tell us?

Looking at the past gold booms, we can see that gold appreciated from the low to the high in a cycle by 5 to 9 times, and if you include the entire 1970’s, we are looking at more than a 20 times appreciation. A scenario of price appreciation of 5 to 9 times, is much more realistic, for investors to anticipate for this coming gold cycle.

The Bear Cycle in the 1970’s

The price appreciation can take a lot longer than you think it will take. There was a correction in the mid 1970’s that could be classified as a bear cycle from 1974 to 1976, which actually discredits the full boom that some try and make claim for. Professional investors try not to fool themselves as to whether or not it was a bear market. A fall of 20% from the high, equals bears market. Only, once the price rises back above 80% of the previous high, it enters into bull market again. Many investors misclassify a bull market, by saying 20% from the low and it enters a bull market, but many times the low can keep going longer than you think. Investors called the low in uranium back in June 2014, when the spot price reached $28.23/lb., this was the lowest pint for the uranium spot price going back to 2005. Then within a few months the uranium price rose to $39.50/lb., rising more than 38%.[1] It was now well more than 20% above the low set in June 2014. What happened next? The uranium price fell more than 50% before reaching a new low of $18.00/lb. in November 2016.

What does the past tell us about the future for Gold?

When we take into account past gold cycle price increases of 5 to 9 times, we are looking at gold price in the range of $5,000/oz. to $10,000/oz. in USD terms. The 22 times, although it sounds “great”, isn’t as realistic because of the bear market that occurred halfway through the 1970’s. The professionals cut their losses and then were able to re-enter again. In other, currencies we could see higher price appreciations of gold.

Next Time You See a Gold Prediction

See if the author is giving you scenarios to think about; the base case, the best case and the worst-case scenarios. These are the three typical scenarios you would want to see. Determine if they are using historical data that supports their price target. In about 10 seconds you will be able to see whether or not the price target is reasonable or not.


Paul Farrugia
email: paul@firstmacrocapital.com
website: www.firstmacrocapital.com

Paul Farrugia is the President & CEO of First Macro Capital. He helps his readers identify mining stocks that can you can hold for the long-term. He provides a checklist of how to find winning mining producer stocks.

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