August 3, 2007
With the weekend at hand, it is nice to know there will be time to seriously
contemplate the important things in life. For many of us, one of those subjects
is gold.
A question I have been asked many times is, “How high could gold ultimately go?”
It is not an easy question and many analysts and experts have been dead wrong on
the subject. Toward the end of the great bull market of 1977-1980, astounding
figures for ultimate peaks in gold were offered, accompanied by statements of
logic that appeared irrefutable. But they were all wrong, as gold went into a
two-decade hibernation from which it is only recently emerging.
Many observers - yours truly included - believe the reasoning behind a belief in
a powerful, long-lasting advancing golden bull market is both rational and
sound. In fact, we offer four of them ourselves in the article accompanying our
website’s home page. If the basic prediction of a major golden bull market is
correct, then it is appropriate to try and answer the question posed above.
First, a simple mathematical comparison. At the peak of January, 1980, gold’s
historic peak was variously registered between $840 and $870, depending on
whether you were using the New York Commodity markets, the London fixes or the
spot markets. It is worth noting that at that time, the U.S. national debt was
$907 billion and the per capita figure was just under $4,000 per person. Today’s
figures are just under $9 trillion and $30,000 per capita respectively. So, in
terms of national debt in America, which does reflect the expansion of money and
debt over the past 25 years, the expansion multiples from the previous peak for
gross debt and per capita government debt are ten and 7.5 respectively. Let us
use “eight” as a representative figure.
At the preceding peak, the widest measure of monetary aggregates in America,
M-3, was about $1.8 trillion. While the government stopped quoting M-3 figures a
few months ago, economists estimate it presently at about $12 trillion - a
multiple of about seven from the previous golden peak.
(As an aside, it is worth noting that the US is so desperate to cover up the
magnitude of previous monetary expansion as measured by M-3, it not only no
longer quotes M-3, it has also erased all historic data on M-3 from government
financial websites.)
So, from a simple mathematical consideration of gross monetary figures, we can
estimate the next peak in gold to be 7-8 times the preceding peak - or $5,600 to
$6,400 per ounce!
There are additional considerations. Citizens of both China and India - totaling
some 2.4 billion people - have a historic affinity to gold and silver. Those
people are growing more prosperous with every passing month. Millions are
entering the middle class every year - and it is entirely logical to assume that
some portion of monetary assets will be placed into gold. According to the World
Gold Council, estimated total gold production is about eighty million ounces per
year, and has been declining slowly since 2000. Therefore, if each Chinese and
Indian person desired to accumulate just one-half ounce of gold per annum on
average, that would consume more than the entire supply of newly-mined gold on
earth. This potential excess of demand over supply alone could send the yellow
metal skyrocketing.
In 1980, it took the coincidence of several factors including the Afghan War,
the ‘twin towers’ of the U.S. Deficit and National Debt, rising inflation,
rising interest rates (yes, rising!!!) and political uncertainty (remember
Carter’s “malaise in the land’ speech) to create the background for that
powerful bull.
Well, today we have a similar coincidence of influences. Middle East wars,
petroleum supply pressures, international terrorism, massive increases in demand
for fundamental production, housing crises and overwhelming liquidity problems
could similarly combine simultaneously to provide an even more high-risk
background to the world’s monetary affairs.
So, putting it all together, the mathematics of American debt and money
supplies, the powerful demand emanating from the Orient, plus the potential for
a possible coincidence of various serious problems, we come to the conclusion
that over the next seven to ten years, a massive golden bull market could unfold
- with many stunning declines along the way - that could ultimately reach the
level of $7,000 to $10,000 or higher!
The historic chart on gold would appear to offer support for this seemingly
fantastic prediction. A tremendous base was formed during the years 1997 through
2002 and a base set in over that long a period of time could provide the
necessary technical confirmation for a fundamentally powerful and long-lasting
golden bull market.
