- Gold & Historical average - Gold should be trading above
$2500 these days in order to clock new ‘real’ highs
- DOW/GOLD ratio points to $5.000+ gold before 2015
- Gold & US public debt - Gold prices required to counter
balance all US public debt held in foreign hands exceed the $10.000 mark
This
piece is an update on 'Gold - Headed to $200 or $10.000?' part II in which we discussed
3 (out of 10) fundamental reasons to own gold. Last week we discussed point
1,2 and 3 making the case for gold to be money, this week we'll discuss point
6,7 and 8 which makes the case for $5000+ gold in the years ahead based on
the thesis that gold is money.
10
fundamental reasons to own gold
- Gold remains ultimate form of payment - No counter party risk
- Currency debasement - US Dollar losing status as world reserve
currency
- Gold crawling back into the monetary system
- Negative
real rates
- Falling gold supply vs increased investment demand
- Gold & Historic averages - gold should be trading above
$2500 these days
- DOW/GOLD ratio points to $5.000+ gold before 2015
- Gold & US public debt - gold prices required to counter
balance all US public debt held in foreign hands exceed the $10.000 mark
- Large short positions - half of all central bank's gold has
been leased into the market. (about 15.000 tons). Covering these short
positions is not possible without catapulting gold prices to
unimaginable highs.
- Gold acting as safe haven in times of rising geopolitical
tensions
6. Gold & Historic averages
Gold should be trading above $2500 these days in order to clock new 'real'
highs
When
experts claim gold to be trading in record high territories these days they always
refer to gold's 1980 peak of $850. Now comparing current gold prices of $950
with the old $850 high of 1980 doesn't make much sense since even a
chimpanzee can understand that one single dollar represented more purchasing
power in 1980 than it does today.
So
in order to calculate 'real' highs one has to adjust for inflation. When we
take the 'official' inflation statistics then we'll see that the 1980 peak of
$850 equals $2500+ today. When we take into account however the more
realistic inflation statistics published by John Williams at www.shadowstats.com then gold
should clock $7000+ these days in order to reach new 'real' highs.
Sure
enough one could argue that the official numbers are calculated by our
government through honest and correct methodologies but by conveniently
taking out those items causing the highest inflation numbers (food and
energy) since the early nineties you can fool most of the people but not for
an indefinite period of time.
The
chart below is being calculated based upon 'official' inflation numbers
and as you can see gold is nowhere trading near new 'real' highs these days.
In order to do so gold should be trading at $2500+
Gold
& Historical Average
7. DOW/Gold ratio - $10.000 Gold before 2015?
The
DOW/GOLD chart is a powerful tool in order to determine major turnarounds.
It's simple, when the DOW/GOLD chart tops you buy gold, when the DOW/GOLD
chart bottoms you buy equities. Once you've established your position you can
ride the wave up or down for at least a decade. The DOW/GOLD chart flashed a
'buy' for gold again in the year 2000 and indeed almost 9 years later gold is
almost up 300% from its lows.
If
it were all that simple why don't we hear that much about this powerful tool?
Well,
the thing is the DOW/GOLD ratio chart isn't a useful indicator in order to
predict yearly price movements. Next year could very well clock higher
readings than this year instead of expected lower readings thereby losing
confidence as being a reliable indicator. Unfortunately that's the same
analogy as denying that higher temperatures will arrive in summer based on a
single day temperature drop in spring. The problem is that the DOW/GOLD cycle
has a wave length that's so big that we humans have a hard time to figure out
where to position ourselves into this cycle
Q: What gold prices could we expect coming years based on historical
Dow/gold ratio's?
A: Between $5000 and $10.000 before 2015
Now
$10.000 gold seems a lot but from an historical perspective it seems a
reasonable target. When the gold price peaked at $850 in January 1980 the DOW
was trading in that range as well. The DOW/GOLD ratio bottomed out at one.
When the markets peaked in March 2000 the DOW/GOLD ratio peaked at 44 and has
been in decline ever since. In order to hit a DOW/GOLD ratio again of 'one'
gold should appreciate near the $10.000 mark indeed with current DOW levels.
I don't see the DOW plunging much further from here. Compare it with the 1968
-1982 period were the DOW hovered around the 1000 mark for 14 years. Same is
happening now, the DOW peaked in March 2000 (inflation adjusted) and it could
take very well another couple of years before the DOW manages to leave the
10.000 mark for good. I mean, there's no economic justification now for the
DOW to rise much further while a surge in inflation will cushion the DOW to
the down-side. A DOW struggling around the 10.000 mark from 2000 to 2012-2015
is not unthinkable and neither is $10.000 gold somewhere in 2012-2015
8. Gold & US public debt -
Gold prices required to counter balance all US public debt held in foreign
hands exceed the $10.000 mark
Gold migrates from a commodity form, to a barometer, to a currency,
to an international assets balance sheet form.
Jim Sinclair
When
gold peaked at $850 in 1980 there weren't that many experts who had called
for gold to reach such highs. One exception however was Jim Sinclair who
called for $900 gold years in advance. Sinclair was considered to be one of
the biggest influence of the gold market these days and often being quoted by
the NY-Times and Wall St Journal as Mr. Gold. Sinclair argued that gold would
eventually try to counter balance the US public debt held in foreign hands.
Sinclair turned out to be right and explains:
When the gold price bottoms, that's the commodity value of gold,
related to the industry's cost curve. Gold will move out of hat into a form
of a barometer. A barometer measures the level of anxiety...Gold becomes a
currency, when the appreciation in gold in percentage terms is greater than
the appreciation in the strongest currency at that time. Clearly then, gold
has been elected as the currency of choice. The maximum value category in
gold, in which gold gets fully priced, is when it attempts to balance the balance
sheet of the United States.
(source: Redburn Research - Gold War, Gold is money and nothing else
page 15)
It
should be obvious that gold is appreciating faster now in percentage terms
than all other paper alternatives (currencies). Now if this cycle (commodity,
barometer, currency, international assets balance sheet form) would unfold
itself like it did in the 70's then what gold prices could we expect? In
other words, what gold prices would be required in order to counter balance
the US public debt in foreign hands?
Let's
first take a peek first at the total Federal Government Debt itself.
Total Federal Government Debt:
As
we can see total federal debt is exploding and stands at $11.3T today. Now
what we are interested in is the total debt being held in foreign hands. The
chart below shows us the answer. Total public debt held in foreign hands is
$3.2652T
Foreign Holdings of Federal Debt
So what gold prices would be required in order to counter balance the US public debt held in foreign hands?
The
answer is a rather simple one. Let's assume the US tells the truth about its
total gold holdings. The US claims to have 8133.5 tonnes of gold which
represents 261.5 million ounces of gold.
In
order to offset $3.2T of US public debt held in foreign hands gold prices
should rise to:
$3.2T : 261M = $12.500
Now
please keep in mind that the total US gold reserves don't change, in other
words, the US is not likely to add to its gold holdings. What IS changing
however is the total public debt held in foreign hands which has been
increasing at a stunning pace of $100 billion a month lately. In order to
keep up with such increases of debt gold prices should increase at a rate of
about $400+ per month.
You
might wonder what the dollar's fate would be without these massive foreign
purchases. Well, the answer is predictable. As described in point 1,2 and 3
the dollar is owned and issued by a bankrupt nation and held up by foreigners
buying up US debt (with some help of the FED). This debt nightmare however
cannot last for much longer, someone who seems to notice:
Obama Says U.S. Long-Term Debt Load 'Unsustainable'
May
14 (Bloomberg) -- President Barack Obama, calling current deficit spending "unsustainable," warned of
skyrocketing interest rates for consumers if the U.S. continues to finance
government by borrowing from other countries.
"We
can't keep on just borrowing from China," Obama said at a town-hall
meeting in Rio Rancho, New Mexico, outside Albuquerque. "We have to pay
interest on that debt, and that means we are mortgaging our children's future
with more and more debt.”
Holders
of U.S. debt will eventually "get tired" of buying it, causing
interest rates on everything from auto loans to home mortgages to increase,
Obama said. "It will have a dampening effect on our economy."
END.
So
the debt load will have a dampening effect on the US economy, well, according
to Pimco's Gross things could be even worse, Gross fears the US could lose
its triple AAA rating which of course would be devastating for the economy:
Pimco's Gross: Sell-off driven by fears US could lose AAA
Thu
May 21, 2009 1:39pm EDT
Reuters
NEW
YORK, May 21 (Reuters) - Bill Gross, the co-chief investment officer of
Pacific Investment Management Co., said market fears that the U.S. is at risk
of losing its AAA credit rating is sending the U.S. dollar, stocks and bonds
under severe selling pressure on Thursday.
Asked what is driving the market declines, Gross told Reuters via email that
investors fear the U.S is "going the way of the U.K. -- losing AAA rating which affects all financial assets and the dollar."
END.
The
US losing its triple AAA rating would be devastating for the economy, pushing
up the cost of borrowing for the Government, which would then feed through to
higher taxes and higher interest rates nationwide. Many investors are limited
to trading in AAA bonds, and therefore a huge number could be dumped on the
market in the event of a downgrade. The end result would be a crashing dollar
which in turn would catapult gold prices straight into new highs!
The
dollar is being sold off again lately and is threatening to breach its 80
level support to the downside. Once this important support level fails then
the dollar's slide could accelerate to the down-side.
When
we take a peek at the dollar's monthly chart we'll see that the technicals
leave plenty of room for a serious decline that could last for many months to
come. Sure enough some support can be expected at the 80 level but since the
dollar breached its 50 mma to the down-side odds are the 80 level won't be
holding for that much longer.
TGDR Dollar Chart - Monthly
END.
Next
week point 9 in which we'll shine a light on GATA and their manipulation
claims and what consequences that might have on gold coming years.
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Comments are welcome at:
ehommelberg@golddrivers.com
Eric Hommelberg
Editor, the Gold Discovery
Letter, the Gold Drivers Report
www.golddrivers.com
All
articles by Eric Hommelberg
If you would like to be kept updated on our charts
and dispatches then you could sign up for the FREE Gold Drivers Report. You
will receive our TGDR Chart of the Day, Discovery News and Trading
Halt/Resume Alerts. You can sign up for free HERE
If you are interested in buying some physical gold
yourself then you can do so in our new bullion store at https://www.golddrivers.com/store where we sell
Valcambi Suisse bars (including assay certificates) in the 1 – 100g
range for almost the lowest prices on the web.
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