Where Gold Prices Are Headed

I want to clear up a potential misunderstanding about gold prices.

Last Friday, Ed Steer wrote "And Then There's This".

So, regardless of what the dollar does, both gold and silver could explode to the moon tomorrow if the four bullion banks that are sitting on their respective prices would either start covering their grotesque short positions, or fold their arms and do nothing...i.e. don't go short against virtually every long that's being placed...which is what they've been doing now for the last 10+ years.

My reaction: Ed Steer isn't wrong, but comments like this can be misleading (I am guilty of making this type of comment too). As a result, some investors now believe that the purchasing power of gold is going to explode.

The reality is that the price of gold in stable currencies will only increase 2 to 5 times (they could briefly spike higher), and the odds that "gold and silver could explode to the moon" in terms of yuan is zero.

As I wrote in *****Ten Major Threats Facing The Dollar in 2009*****, rallying gold prices are a herald of a dollar collapse more than anything else.

4) Gold

Rising demand for physical gold is a threat to the dollar because it signals a growing loss of confidence in the paper currency.
It is also key to understand that gold prices aren't rising because of the changing fundamentals of gold, but because of the changing fundamentals of the dollar. In other words, gold isn't rallying, THE DOLLAR IS FALLING.

Gold is history's oldest and most stable currency. Its utility is simply that it is rare, and for 5,000 years people have used it to store value for the future. All the gold that has ever been produced would fit in a solid cube of about 19 meters on each side, and this cube is only expanding by about 12 centimeters a year (2%). Since
the value and supply of gold itself are fairly constant over long periods of time, the main driver of gold price fluctuations is the ebb and flow of confidence in paper currencies. Rising gold prices are, therefore, a signal of a weakening currency, which is why governments hate them and try to suppress them.

Right now, there is unprecedented worldwide demand for physical precious metals. As a result of this surging demand, gold futures have experiencing backwardation, a rare market condition where gold futures trade under spot prices. It is a signal that gold prices are headed higher and that confidence in our currency is fading quickly. When gold prices break above 1,000 again, the event should be recognized for what it is:
the herald of a dollar collapse.

The value of gold over centuries

To put where gold prices are headed in context, here is a chart of the value of gold over the centuries.



In five years, I would expect gold to be somewhere between $2,000 and $5,000 on this chart.

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8 Responses to Where Gold Prices Are Headed

  1. Jane says:

    Dear Eric,

    Gold price in $2000-$5000 will means high inflation, not hyperinflation.

    I really think you should use less the word hyperinflation in your future posting. It is a bit misleading.

  2. stibot says:

    Dear Jane,

    read carefully, you misunderstood. The pricing is in terms of today dollars. There are no implications for inflation rate.

  3. Jane says:

    If we start that chart from 1600 (supposed that chart is correct), average gold price is at $300-$400 at best.

    So, current price of $920 is not very cheap.

    I didn't say it won't go up, I just think current price is not cheap...

  4. dashxdr says:

    Eric -- good point about being realistic about gold "skyrocketing". Gold priced in dollars will go to the moon. But gold's purchasing power will not, as you say.

    Peter Schiff argues we can count on 1 ounce of gold buying the dow jones industrial average -- dow:gold 1:1 ratio. That could happen again. Most likely will.

    Gold goes up, dow goes down, most likely. Then they'll meet somewhere.

    Silver, on the other hand, is a much better play. The 71:1 gold:silver ratio is unsustainable. Silver will stabilize around _its_ historical norm, the 15 - 20 range with respect to gold. Silver's way underpriced.

    So as gold goes up, silver will go up even faster.

    I'm watching gold and silver in comparison to real estate. My plan is hold silver, then transition to gold, then buy a lot of land such as farmland when the time is right.

    Gold is much more stable than silver, for long term preservation of wealth.

  5. Jimmy says:

    dashxdr,

    If you are very bullish on silver, why don't you load a lot of silver miner stocks? They can appreciate much more than physical silver. Are you very concerned about counterparty risks?

  6. Anonymous says:

    Jane, the average price of gold after the spike of gold in 1980 was indeed around $400. Adjusted for inflation, today's $920 correspond to $400 in 1982. (In 1982, a first class stamp was 20 cent, today it is 44 cent). So the price of gold is not expensive today. The average cost to mine an once of gold today is around $700 per ounce.

  7. dashxdr says:

    "If you are very bullish on silver, why don't you load a lot of silver miner stocks?"

    This investment strategy can pay off bigtime, as described in James Dines' book, "The Invisible Crash". Some equities rose by over a factor of 300. JD's point was you only need one of those to pay off and you're set for life.

    I believe in diversification. I like physical silver because it is impossible for governments to steal it away.

    However in my stocks portfolio I have some mining stocks as you suggest.

    I'm not really trying to explode my wealth into the stratosphere. I'm content with just preserving it across the ongoing collapse. Life's not all about money.

  8. M says:

    "It is also key to understand that gold prices aren't rising because of the changing fundamentals of gold, but because of the changing fundamentals of the dollar."

    But Fundamentals are changing - Central banks are becoming net buyers - pretty fundamental! Although true that It will primarily be the US dollars decline driving the gold price, It will be the limited exit options for US dollar holders that will drive the price up beyond its funadamentals.

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