$10,000 Gold May Be Reasonable; Or Wishful Thinking; Or Meaningless

Is $10,000 gold reasonable?

Right now, from gold’s current price point of $1240.00 per ounce, we are speaking of an eight fold increase to get to that gloriously celebrated (at least by some) number.  Even if the specific price target is more modest – say $7000.00 per ounce – it is still a huge jump from where we are today. 

It is, however, a reasonable possibility.  Between August 1976 and January 1980, gold rose from $100.00 per ounce to over $800.00 per ounce.

More recently, an increase in gold from $275.00 per ounce in 2000 to its eventual all-time high of $1900.00 per ounce in 2011 translates to a seven fold increase.

There are some key things which differentiate the two examples. But the simple absolutes indicate that a $10,000 price objective for gold is not unreasonable, at least on a percentage-increase basis.

However, some of the differentiating specifics from the two examples are also applicable to scenarios which might lead to $10,000 gold.

One is timing.  In the first example gold had already risen from $40.00 per ounce in 1971 to close to $200.00 per ounce in February 1974.  After hitting a retracement low of $100.00 per ounce in August 1976, gold rose to $850.00 per ounce in January 1980.  That’s less than three and one-half years.

In the second example the seven fold increase took place over an eleven year period.  The low point of $275.00 per ounce was twenty years past its previous all-time high of $850.00 per ounce and was its ultimate low point before it began its decade-long run to $1900.00 per ounce.

Both periods were similar in total length (about ten years).  In the second example, if the $650.00 per ounce retracement low in 2008 is used, then the timing becomes more comparatively similar to the first example of the 1970s decade.  What changes is the magnitude of the move cited.

The timing of both examples would run similarly in length – approximately three years (August 1976 to January 1980; August 2008 to August 2011.  But now the percentage increase for the second example becomes three fold ($1900.00 divided by $650.00) rather than seven fold.

And if we compare both periods in their entirety (1971-1980; 2000-2011) the numbers are even more dramatically different.  In the earlier decade the price increase in gold was from $40.00 per ounce to $850.00 per ounce.  That is a twenty-one fold increase. And it is three times greater than the seven fold increase in the latter decade.

Question:  Where are we now?  If we accept that $10,000 gold is a reasonable number (with some caveats), when might that happen?

The high point for gold in 2011 at $1900.00 per ounce occurred nearly six years ago.  And that high point was achieved in concert with a decade-long decline in value of the US dollar.

Since 2011, however, we have had nearly six years of declining gold prices accompanied by a stronger U.S. dollar.  Will the low of $1040.00 per ounce in January 2016 (and subsequent reversal in direction of both gold and the U.S. dollar) prove to be the point we measure from when comparing gold’s next move to much higher levels?  Or, is there a lower number still to come?

There were twenty years separating the two decades we have reviewed.  If we allow for something similar now, it is possible that gold might not reach its next low point relative to the U.S. dollar until 2030.  (please note: that is not a prediction)

Also, there was a thirty year span between the 1980 peak price of $850.00 and the 2011 high point of $1900.00.  That might imply (very loosely) that the next ultimate high point for gold could be as far off as 2040.

With these possibilities in mind, $10,000 gold anytime soon might just be wishful thinking.

Another specific is the Federal Reserve.  Having had the opportunity and time to ply their trade again and again, the sorcerers at the central bank continue to find favor with the gods of paper money.  At least this is so, when the basic objective and standard of measurement is to avoid complete financial and economic disaster.  There is a difference between the ‘highway to hell’ and burning eternally at the destination.

‘What we don’t know’ is a variable with infinitely spectacular implications.  What we don’t know includes: the actual size and extent of the Fed’s balance sheet; anything which the Fed hasn’t told us; potential surprise announcements by the Fed or the government (confiscation of assets, bank holidays, etc.).

Has the Fed lost control? It is a possibility.  But the financial markets don’t think so. Yet.

If events unfold in such a way as to create the ‘perfect storm’, then $10,000 gold could be a reality much sooner, rather than later.  But the price quote may be meaningless.  Here’s why.

Any combination of events which leads to $10,000 gold within a relatively short time frame would also be accompanied by declines of similar magnitude in the value of the U.S. dollar. This means that credibility of the dollar and desire to hold it would drop to horrendously low levels.

The flow of goods and services would be affected negatively if people were unwilling to accept U.S. dollars in exchange for their items of trade. If it becomes bad enough, a complete repudiation of the U.S. dollar might occur.  That is a worst case scenario, but it needs to be considered if you think gold is your ticket to riches.

At a time like that, $10,000 gold (or any U.S. dollar price of gold) becomes meaningless.  What becomes critical is not the price of gold, but how much gold you own.

And in what form.  Gold stocks, ETFs, and futures contracts are all paper products with ties to the metal which would be tenuous at best given the conditions that would likely accompany the lack of a functional currency.

If you are a trader/investor who expects $10,000 gold, it might be a good idea to reevaluate your expectations with respect to timing, conditions (known and unknown), implications, and form of ownership.

Owning physical gold is a means of preserving wealth. Gold is original, real money. It is a store of value. (see Gold Is Real Money)

Gold’s price is a reflection of the long-term decline of the U.S. dollar.  The two are inversely correlated. (see Gold: It’s All About The U.S. Dollar)

 

 

 

 

 

 

 

 

 

 

 

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