Monday, August 15, 2011

The Case for $25,000 per Ounce Gold

Gold is trading off a bit from its recent high of $1,800 per ounce. This does not surprise me. Whenever a stock or commodity picks up strong momentum, short-term traders jump in for the ride. These short-term traders hold no fundamental understanding of why a commodity or stock is going up. They are just along for the price action. Since they have no fundamental underpinning for their purchase, when there is some short-term downward pressure, they sell because of that downward pressure. Indeed, in the EPJ Daily Alert I have warned that a $500 per ounce drop in the price of gold could occur. It could occur now, or when gold hits $2,500 per ounce. But this selling will have no relevance to the long-term price of gold,which likely will be much higher.

Here is my case for a much higher gold price.

It has often been said that gold climbs with the price level, that 100 years ago you could buy a very nice suit for an ounce of gold and that you can do the same today. That was true, but I think things are about to change. Over the last roughly 50 years, gold has been accumulated by gold bugs. As prices climbed, gold bugs saw their incomes climb as well and thus they had more money to spend on gold. Thus, the price of gold climbed roughly in line with the price level. This is now changing.

The gold bugs are still in the game, but they have company. Central banks have become net buyers of gold, as have many others. The crises in Europe has caused many overseas to seek gold out. And in the United States, the possibility for many new gold buyers emerging is very strong.

During the inflation of the 1970's, gold climbed in price, but this only really started after President Ford made gold once again legal to own in the United States. It took much of the 1970's for people to realize that gold was an important inflation hedge. But now after we have that lesson under our belt, along with the recent decade long climb in gold from roughly $250 per ounce to $1,800 per ounce, most in America understand that gold is a very important inflation hedge.

Yet the number of Americans who actually own gold is likely under 10%. The question must be asked, "What happens if price inflation really accelerates at some point, as it is likely to do?" The answer most likely is that many more will flock to gold.

In the old days, if price inflation pushed prices up over a few years by 100%, gold would likely climb by as much. Based on its present level it could climb to roughly $3,000 area, as gold bugs continue their steady buying. But what if the next massive price inflation brings with it a flight away from the dollar as a reserve currency and causes the number of owners of gold in the United States to climb from under 10% to, say, 50%? This would result in huge new demand for gold. Instead of stopping at $3,000 per ounce, gold would be a multiple of that price. $25,000 per ounce would not be out of the question. It's possible that the new demand for gold could be so great that an ounce of gold instead of resulting in buying one good suit, could allow you to buy two or three good suits, maybe 10.

Bottom line: Greater price inflation is likely to boost the price of gold, just because of more gold buying from gold bugs, but the next great wave of inflation is likely to result in lots of new buyers. Stepped up buying by central banks, buying by the very wealthy and buying by the average American.

Will such a price inflation come? The United States is already pumping money at very strong levels, six percent plus. The euro crisis may result in printing by the European Central Bank, which will magnify on a global scale price inflation.

The printing in the United States will likely be enough to push gold much higher. If the ECB does the same, we could be very near global inflation---something never seen on this planet before. If global inflation occurs, $25,000 per ounce may be a conservative estimate as to where gold climbs.

In other words, don't sell your gold coins just yet, in the next round of inflation, there is likely to be a huge new group of lawyers, doctors, corporate executives and business owners buying gold. They will drive the price to currently unimaginable levels.


  1. Great writeup!

    It's the reason for the last year I've been focused on silver even though more volatile.

    I'm worried about a host of issues with gold, including confiscation. (not that I haven't planned around it...but I want liquidity too)

    I see more upside to silver because it's not being advertised and wrote about everywhere for now....

    But I might be wrong...we'll see.

  2. Almost 3000 a ounce. And this is the price before the crisis hits.

  3. Here is a great list generated by a liberal, that I think typifies their thinking. It would be great to respond to all of the items line by line. No Medicare or Social Security? What a shame. No public schools? Why, whatever will we do? Just pay your "fair share" prole - these are problems that only the welfare state can solve.

    1. Do not use Medicare.
    2. Do not use Social Security
    3. Do not become a member of the US military, who are paid with tax dollars.
    4. Do not ask the National Guard to help you after a disaster.
    5. Do not call 911 when you get hurt.
    6. Do not call the police to stop intruders in your home.
    7. Do not summon the fire department to save your burning home.
    8. Do not drive on any paved road, highway, and interstate or drive on any bridge.
    9. Do not use public restrooms.
    10. Do not send your kids to public schools.
    11. Do not put your trash out for city garbage collectors.
    12. Do not live in areas with clean air.
    13. Do not drink clean water.
    14. Do not visit National Parks.
    15. Do not visit public museums, zoos, and monuments.
    16. Do not eat or use FDA inspected food and medicines.
    17. Do not bring your kids to public playgrounds.
    18. Do not walk or run on sidewalks.
    19. Do not use public recreational facilities such as basketball and tennis courts.
    20. Do not seek shelter facilities or food in soup kitchens when you are homeless and hungry.
    21. Do not apply for educational or job training assistance when you lose your job.
    22. Do not apply for food stamps when you can’t feed your children.
    23. Do not use the judiciary system for any reason.
    24. Do not ask for an attorney when you are arrested and do not ask for one to be assigned to you by the court.
    25. Do not apply for any Pell Grants.
    26. Do not use cures that were discovered by labs using federal dollars.
    27. Do not fly on federally regulated airplanes.
    28. Do not use any product that can trace its development back to NASA.
    29. Do not watch the weather provided by the National Weather Service.
    30. Do not listen to severe weather warnings from the National Weather Service.

  4. Eventually all those new buyers of gold will eventually want to sell right?

  5. In a crisis, what is gold really worth?

    You can't eat it. It doesn't keep the weather out. You can't hunt with it. It can't carry you from one place to another. You can't use it to defend yourself. And ultimately when the chips are down, you can't trade with it because people will be wanting all those things it can't do which makes it....worthless.

    So by all means disregard PT Barnum's wisdom because there are plenty of minutes until the fall.

  6. @Anonymous (11:28 am), why would you want to trade gold during a crisis? That is when it will appreciate the most. A certain amount of fiat cash is required to endure a few months of crisis. Good luck with your paper assets.

  7. @anon 11:28

    "And ultimately when the chips are down, you can't trade with it because people will be wanting all those things it can't do which makes it....worthless."

    What if I have milk, person A has shoes and you have bread. I want bread, but not shoes. Person A wants milk, but not bread. You want shoes, but not milk. How can any trade occur? A medium of exchange that offers a store of value - otherwise known as money - i.e. gold

  8. Doc, what do you think of the 'Bretton Woods formula' for gold price?

    The U.S. money supply ranges from $2.0T (M1) to $9.3T (M2). The U.S. government states that it has 8.1 tons of gold (261.5 million ounces). Thus, if every dollar in circulation were backed by U.S. government gold, the price of gold would range from $8K to $36K.

    Is the Bretton Woods formual a sound adjunct to your gold price forecast?

    I think that the U.S. will return to a gold backed dollar, de facto or de jure. China and other past buyers are slowing their purchases of Treasuries (see this morning's TIC data) and buying gold. Thus, unless the U.S. makes the dollar (and Treasuries, by extension) 'as good as gold' again, we will continue to see movement away from purchases of Treasuries. If we do back our dollar with gold, though (see Bretton Woods formula), we will preempt any sell off of Treasuries.

    This is my (tortured?) logic for why, de facto or de jure, we will return to a gold-backed dollar.

  9. 11:28 when GOLD is a valuable item at thousands of dollars an oz, people will WANT IT. They want it like they wanted the ipod and lined up for days in advance. Like the HARRY POTTER movie or when cell phones came out. Its VALUABLE to the masses. Regardless of whether a crisis emerges people will trade ANYTHING for something very valuable...even their kids.

  10. @Anonymous (11:28 am), why would you want to trade gold during a crisis? That is when it will appreciate the most. A certain amount of fiat cash is required to endure a few months of crisis. Good luck with your paper assets.

    ...Writes Bob English

    I never said I would try and trade in paper money. And as for a "fiat currency" you can find no other to fit that definition better than gold. Who defines what it's worth? You? Me? Someone else? If I say it's worth nothing- then it really doesn't matter to me what value you place on it does it?

    Now Danger Pioneer correctly asks the question, "What if I have milk, person A has shoes and you have bread. I want bread, but not shoes. Person A wants milk, but not bread. You want shoes, but not milk. How can any trade occur? A medium of exchange that offers a store of value - otherwise known as money - i.e. gold"

    However he falls into the same quandry. If gold is useless to me, then I continue seeking trade with others until I find something I consider of value and most importantly I can easily trade with others who value it as well.

    You listen to people who have gone through severe crises like Katrina- they would give all the gold in the world for something others value as well-- even a six pack of beer can be worth more in a pinch than a gold brick if you meet someone who is thirsty.

  11. @Anonymous 1:08 PM: I know you did not say that you would trade in paper money. I'm suggesting you keep some on hand, as it will be useful in a true monetary crisis (along with basic necessities), though it will indeed devalue quickly. I would expect barter to become prevalent as well.

    One of the reasons gold is valuable is precisely because it is useless to you. Which is why silver will not appreciate nearly as much.

    All prices are historical. All value is personal, subjective and ordinal. So what is your point? Katrina in not an apt comparison as it did not involve a monetary crisis. In fact, there is no historical precedent for the ebbing of a global fiat reserve currency.

    Long physical gold is shaping up to be one of the greatest gimmee trades of the century. Hold it through the crisis. Sell it afterwards.

  12. Bob I can see your perspective, but I think gold is a bubble that will burst suddenly and the monetary crisis will not occur in a vacuum.
    This is just an article that I found very interesting on this very subject.

    Invest in gold if you will, it's your money. I just know that the experts who say it's never happened before therefore it can never happen are usually the ones left out in the cold when it inevitably does.

    No one will be insulated from a crisis. Not those with gold or without it. Everyone will need food and water, gold you can live without as billions of us do everyday.

    Let's hope you're right and any storm that comes passes quickly. If not, I'm afraid the new normal will not involve "selling it afterwards".

  13. Anonymous @ 1:08 PM said, "If gold is useless to me, then I continue seeking trade with others until I find something I consider of value and most importantly..." [Notice this most importantly part.] "...I can easily trade with others who value it as well."

    It doesn't really matter much what value you place on gold, does it? What matters Is how much value others place on gold.

    When faced with this dilemma, "What if I have milk, person A has shoes and you have bread. I want bread, but not shoes. Person A wants milk, but not bread. You want shoes, but not milk. How can any trade occur?"

    Your solution is to keep on looking and looking, wasting time, energy and other resources doing without while you seek out the perfect match for a trade,... all the while, the goods you passed up because you didn't have gold, lingers in your mind?

    The obvious solution is to have some trade-able high demand goods And have gold, no?

    Retired Professor of Finance: "Gold's Price Is Not A Bubble Price"

  14. You will probably see gold at $3000 when the dollar default happens. probably within 24 months.

  15. Here's maybe another way to look at it:

    An attempt to determine possible future purchasing power:

    There is approx. 20*20*20=8k (m^3) of gold ever mined. Let's say that this has not been degraded by industrial use etc. Density of Au=19300 kg/m^3. So total mass by all means less than 170k tonnes or 1,7*10^11 g.

    What are the total net assets of the world? It probably does not even make sense to measure this, but let's go with one online finding: approx. USD 195 trillions according to Credit Suisse last year... (

    Let's then do some pretty arbitrary subtraction of the value of gold and silver and settle for USD 180T.

    Now we divide the net worth with all the gold:
    180T/(1,7*10^11)= approx. 10^3 USD/g, which would mean approx. USD 30k/troy oz. in purchasing power.

    Does this make any sense whatsoever? Just some random thoughts.

    Certainly, in the case of inflationary collapse, price should go much higher...

    Your thoughts?

    Best regards,

  16. I never liked the "nice suit" argument for determining the purchasing power of an ounce. I think we can count on more money printing, which will send prices higher in the long run.

  17. this post was sure to bring many comments hehe.
    25K seems like an absurd number? what would a barrel of oil be 1k? That wont be good for any one.

  18. I would rather eat gold than paper, I would rather have a shelter made of gold than paper, I rather hunt with gold brick than paper, I rather defend myself with a gold brick than paper, I would rather have gold to trade than paper.


    Do these indoctrinated government-lovers even listen to themselves?

  19. I have been buying both silver and gold, and stocking up on other things that will be important when hyperinflation hits, food riots begin, and nationwide strikes bring a halt to commerce.

    Have a stash of paper money for the hard times? Of course. When the ATMs stop working, you will want some cash. But at some point you will need something valuable to trade.

    Silver and gold will be useful for trading purposes, as will canned goods, toilet paper, candles, batteries, bottled water, etc.

    Don't forget cigarettes. I don't smoke, but in a real emergency I'll bet I can trade packs of Marlboros for something I really want!

    The point is to "invest" in whatever others will want in a crisis. In the short run that may be paper dollars, and then gold and silver. But in the long run you may be able to trade a few cartons of cigarettes for a baby grand piano.

    That is not an exaggeration... read about the early 1920s in Germany and Austria.

  20. Disagree completely. Gold is a good hedge because it has industrial value. In other words its value is intrinsic because it can directly be made into things of value. Its value in dollars can definitely be aided by MONETARY inflation, but at the same time this value tails PRICE inflation. In other words the cost of the good that makes the good DETERMINES the price it doesn't change in reaction to it.

    I defy that MONETARY inflation will ever drive gold to 15X its value. We'd scrap the whole dollar system before it even reached 5X (an absurd 500% monetary inflation). And short of this scenario, we won't see price inflation levels this high because the things that make the things obviously cannot outpace price inflation. The only scenario in which this is possible is if someone develops some gold based perpetual energy source, thus making gold's commodity value multiples higher than it is currently. Yes I understand gold doesn't exhibit TRUE commodity behavior all the time, but the rules apply enough to prevent such a scenario. I say bullocks...

  21. Perhaps we're already at the point where describing gold's value in terms of dollars is useless. How many Swiss Francs do you project gold to be worth in the future?

  22. Economic bubbles require undisciplined human behavior to fully develop. Yes gold is hot right now. Yes the gold bugs deserve due credit for predicting it, and capitalizing. But this article is a fantasy scenario borne of the same pipe-dream thinking that traps every person caught in a bursting bubble. You may be able to extrapolate some scenario in your mind that ends with $25k gold, but it requires denial of so many economic and human factors that the author should be embarrassed. Competition in gold buying by banks for instance is not a boon for gold. It's a boon for dollars. Banks don't lend gold they lend money. But wouldn't you want to lend and borrow money with a bank sitting on a huge stockpile of gold? Wouldn't you be willing to pay more in interest for gold security? The higher the price of gold goes the more true this becomes. Do you think we'll see 1500% inflation before a leveling effect takes place. Utterly ridiculous. Human nature is such a powerful force. Amazing to see the most disciplined gold bugs stricken with the greed and denial of 2005 homebuyers. You all need to get a grip...

  23. OK, I bought my gold.
    The crisis came and it was a bitch.
    The dollar died.

    I have this gold then.

    People, being political animals, have finally created new central bank(s) or maybe used the World Bank or maybe used the IMF, who knows. But they've created another fiat currency which is used by everyone to live with.

    Just exactly how much of the new currency are they going to give me for my gold? Especially since they no longer need to hold gold as a hedge against inflation or collapse. Gold may be worth $25,000 of the destroyed dollars. But what if it's worth $200 of the new currency - which will buy you a suit of clothes?

  24. Anonymous @ 07/16 7:01 PM asked how much would gold be worth in terms of "Neodollars." This is really the wrong question to be asking, big time. Gold will always have a market, a REAL market which will be priced in terms of various currencies, unless the currency represents a redeemable amount of gold itself. What will be the exchange rate for fiat Dollars against "Neodollars" be? THAT is the question that should trouble the gold doubters. Presuming that "Neodollars" are fiat or only "pseudo-redeemable" then essentially, the exchange ratio between the old currency and the new will entirely be at the whims of politicians, bureaucrats, and bankers. Whom do you suppose those exchange ratios will be arbitrarilly set to benefit. The gold doubters presume that "Neodollars" are automagically have more purchasing power even if they are themselves unredeemable or only pseudo-redeemable, such as a "basket of goods" backing would be. This is fiat money superstition. How many Neodollars is/are the government(s) going to dole out to you in exchange for your old, worthless dollars? If the Neodollar is unbacked fiat, they will set the dollar:Neodollar exchange ratio by fiat. The pols, bureaucrats, and bankers will not be likewise able to set the gold:Neodollar ratio and it will reflect the ACTUAL ratio of exchange between Dollars and Neodollars.

    Example: Consider the scenario where I buy five ounces of gold for 2000 old dollars and then the Neodollar regime is instituted. If the arbitrary exchange rate between Dollars and Neodollars is arbitrarilly set at 10:1 but the price of gold in terms of Neodollars is set by the market at a "mere" 500 Neodollars per ounce, then I will be ahead to buy the gold with old dollars and then sell it for Neodollars than I would be if I put myself at the mercy of political whims and waited to exchange my dollars for Neodollars directly.

    In the dollar to Neodollar trade, I would end up with 1000 Neodollars for my 10,000 dollars. In the gold trade, I would end up with 2500 Neodollars for my gold. How much faith do YOU believe the market will have in Neodollars immediately following the collapse of the "world's fiat reserve currency?" I'm betting not much faith.

  25. Hugo Chavez just nationalized gold production in Venezuela. One step closer to $25,000.

    Link via ZeroHedge:

  26. I find it funny when people tell others not to buy gold, with the full realization that an economic crisis is coming. Shouldn't we take ALL the necessary steps (that we have the means to anyway) to protect ourselves? There are obviously people who value gold, so wouldn't it be smart to have some on hand...just in case? I mean aren't we trying to prepare for something, of which, no one can truly predict the outcome?

  27. I agree with the previous comments. Gold is a precious metal and it's good to always have it at hands. The gold's value may depreciate at times but it increases more than it decreases. So, it is still a good move to investment in golds. sell precious metals wny