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.