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While many of
us at Casey Research don't like making
price predictions, and certainly ones accompanied by a specific date,
it's hard to ignore the correlation
between the US monetary
base and the gold price.
That
correlation says we'll see $2,300 gold by January 2014.
There
are plenty of long-term charts that show a connection between gold and various other forms of money (and credit).
Most show that one outperforms
until the other catches
up. But let's zero in on our current circumstances,
namely the expansion of the US monetary
base since the financial crisis hit in 2008.
Here's the performance of the gold price compared to the expansion
of the monetary base since
January 2008.
 
You
can see the trends are very similar. In fact, the correlation
coefficient is an incredible
+0.94.
Since the Fed has declared
"QEternity," it's
logical to conclude that this expansion of the monetary base will continue. If
it grows at the same pace through January 2014, there is a
high likelihood the gold price
will reach $2,300 at that point. That's roughly a 30% rise within 15 months.
And
by year-end 2014, gold could
easily be averaging $2,500 an ounce. That's 41% above current prices.
Some may
argue that there's no law saying this
correlation must continue. That's
true. And maybe the Fed doesn't print till 2014. That's possible.
But
it's not just the US
central bank that's
printing money…
- European
Central Bank (ECB) President Mario Draghi has declared that it will buy unlimited quantities of European sovereign debt.
- Japan's
central bank is expanding its current purchase program
by around 10 trillion yen ($126 billion) to 80
trillion yen.
- The
Chinese, British, and Swiss
are all adding to their
balance sheets.
The
largest economies of the
world are all grossly devaluing
their currencies. This will not be consequence-free.
Gold and silver will be direct beneficiaries –
as
will mining companies – starting with rising prices.
There
are other consequences, both good and bad, of gold hitting $2,000 and not stopping
there. We think investors should be prepared
for the following:
- Tight
supply. As the price climbs and attracts more investors, getting your hands on bullion may become increasingly difficult. Delivery delays may become commonplace. Those who haven't purchased a sufficient amount will have to wait in line,
either figuratively
or literally.
- Rising
premiums. A natural
consequence of tight
supply is higher commissions. They won't stay at current levels indefinitely.
Premiums doubled and more in early 2009, and mark-ups
for silver Eagles
and Maple Leafs neared
a whopping 100%.
- Swelling
profits for the producers.
If margins on gold production average $1,000 per ounce now, what will earnings be like when they average $1,500? At $2,000?
Gold can rise much faster than operating costs, so this could happen. Imagine what this could do to dividend payouts, especially those tied to the gold price and/or earnings.
- Tipping
point for a mania. There will
be an inflection
point where the masses enter this market. The average investor won't want to be left behind. Will that happen when gold hits
$2,000? $2,500?
The
message from these likely outcomes is to continue accumulating
gold – or to start without
delay. Waiting will have consequences of its own.
People
say that there's nothing certain in life
except death and taxes.
In my view, $2,300 gold is a close second.
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