$10,000 Gold and $700 Silver
When I first began to talk about gold hitting over $10,000 an ounce and silver going over $700 an ounce in our lifetimes, various people greeted me with general incredulity. This is not too surprising when we see the two metals currently going for $445 and $7 respectively. But, then again, when you told someone in 1933 that gold was going to go from $20 to $850 in his or her lifetimes, I suspect the reaction would have been exactly the same.
The exact numbers I gave in my first newsletter were $10,800 for gold and $775 for silver and by "in our lifetimes", I really meant our lifetimes rather than five years down the line! It is good to set objectives or look beyond our current situations, and by setting these benchmarks or ultimate goals, one can get a sense of what the grand scheme for gold and silver will be in the decades ahead. For the long term buy and hold investor, it is especially comforting.
So, how did I come by these numbers? The answer lies in one of the tools I use for long-term analysis and that is the Kondratyev wave. As someone else described, the Kondratyev wave is a generational shift in sentiment between paper and hard assets. Over a period of about two generations, this wave has an inflationary upwave, which favours hard assets like gold and a deflationary downwave, which favours paper assets such as stocks and bonds.
Kondratyev students are in general agreement that the last deflationary wave ended about 1948 having begun about 1919. The Kondratyev wave we are about to finish began an inflationary upswing from 1948 to 1980 when inflation and interest rates blew off in tandem with gold and silver prices. After that, the deflationary downwave began a 20-year course of falling interest rates, disinflationary pressures and falling commodity prices. Note that disinflation was now the name of the game instead of deflation due to the fiat money regime that existed to fight deflationary forces.
Gold and Silver have suffered as much as any commodities in this 21-year deflationary bear market. How do commoditized gold and silver do in times of deflation and disinflation? The answer is simple. Gold dropped from $850 to $255 and silver from $50 to $4. A 70% and 92% drop respectively, terrible by any standard of investor metric. To drive home the deflationary woe, when gold hit $255 in 1999, this was the equivalent of about $125 in 1980. Thus, the true deflationary effect was an 85% drop in real terms. For silver, the real purchasing power drop was from $50 to $2 - a bone crunching 96% drop!
But now I suggest that the Kondratyev downwave ended for commodities around 2001 and we now anticipate a new inflationary era for the foreseeable future. We merely await the confirmatory upswing in interest rates to break through their 20-year downtrend.
In this new upwave, what are the prospects for gold and silver? The last K-upwave from a commodity point of view was 1932 to 1980. For example, according to the annual average prices for the London Silver Fix, during the last deflationary crash from 1919 to 1932, silver dropped from $1.336 to $0.254 per troy ounce. This was an 80% drop that should be compared to the aforementioned 92% drop for the corresponding downwave of 1980-2001.
From that point onwards, silver advanced from $0.254 an ounce to $50, a 196-fold increase. Note that in the same time frame, the Dow Jones Industrial Average "only" advanced 23-fold. Silver returned 850% more profit than the Dow over 48 years. How many people actually profited from silver over this period is another question. Cash was king in 1932, not many were about to load the boat with stocks let alone silver. But then again, the Kondratyev upwave was as yet an unknown concept.
As a benchmark, we can anticipate similar proportions to apply for the next upwave. From a low of about $4.00 and using this 196-fold increase that appertained to silver during the 1932-1980 era, this gives us a price objective of $775 per ounce of silver when this current upwave ends in the years to come. Does this seem preposterous? Will the common 1921 Morgan silver dollar I hold in my hand which I picked up for $10 really be worth over $550 in my retirement years? Yes, when you see how silver performed in the last K-upwave.
What about the king of metals? Applying the same criteria gold started at $20 an ounce in 1932 and enjoyed a 42.5-fold increase. Again, using the downwave low of $255, this gives us an ultimate upwave price objective of about $10,800 per ounce. I would also note that dividing this projected gold price by the projected silver price gives us a near-historical gold-silver ratio of 14. Perhaps there is method in this madness!
Of course, just as gold and silver did not stay at $850 and $50 for very long in 1980, so we would not expect them to stay long at $10,800 and $775 if a spike occurs at the next Kondratyev plateau or peak. Based on an average length of 54 years between peaks we add 54 to the last peak in 1980 to arrive at a suggested blow off about 2034 if not sooner.
How gold and silver consistently performs over this time period is also an important subject for analysis. It will not be a steady rise from one price level to another. The last upwave was punctuated by complete monetary control, secretive manipulation and floating market prices. We expect the same to happen again in different measures at different times culminating in a return to a monometallic or bimetallic monetary standard. This will have profound implications for investors.
Is this too good to be true for gold and silver bugs? Well, we must remember the Kondratyev upwave has at least two decades to work its inflationary pressures (and sometimes contend with deflationary dips) and various events could alter the way prices go. For example, gold could be remonetized before these price blow offs occur. Or take the impending peak in global oil production commonly known as Peak Oil. When (not if) this occurs, it will have a double-edged effect on gold as first a commodity and then as a monetary asset (I examine these effects in my next newsletter for those interested). The future is unwritten, but there is no harm in indulging in some informed speculation.
One more observation, using one of the CPI inflation calculators available on the internet, I note that the 1932 deflationary low of $0.254 expressed in 2001 dollars (the last deflationary low for commodities) comes out at $3.29 which is not far off the actual value of about $4.00. Likewise for gold, the 1932 low of $20 equates to $258 in 2001 dollars, only $3 off the actual 2001 low. Our numbers appear to be on course from the position of an anticipated 2001 launch pad! The ride for the rest of our lifetimes may turn out to be rocky, but the rewards will be great to those who get in early and hold on despite the intermittent forces prevailing against them.
Roland Watson writes the investment newsletter The New Era Investor that can be purchased for an annual subscription of $99. To view a sample copy of the newsletter, please go to www.newerainvestor.com and click on the "View Sample Issue Here."
He invites comments and questions at: email@example.com.