GOLD -- How High?

By: Randy | Thu, Jan 31, 2008
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Well, as expected, the Fed cut rates again today and Gold took off while the dollar fell.

Bernanke cut rates on December 11th, followed it up with a emergency cut last week, and then a new one today. Holy cow! Sure seems like someone is running scared, as cuts are becomming quite a common occurrence. I even believe we may see another emergency cut before March 18th. Stay tuned...

So, with all the recent rate cuts, what's happening w/regard to our economy and what are the expected consequences for gold?

Let me try to keep this simple and find a good starting point:

If you've been keeping an eye on the Gold and Silver Market over the last couple of years, you're probably well aware of the fact that precious metals (PM) are exploding in price, but (like many) maybe you don't really understand the PM market, or recognize the reasons why we're seeing the rapid price increases.

Well, in an attempt to help you understand what is transpiring, I'll provide a few of the reasons for the price explosion below:

Now, I'm not saying that we won't encounter a volatile ride w/gold, as we will most likely experience wide swings in the future--some up and some down (maybe even a down-swing back into the low $800's in the not so distant future), but overall I believe the mid-to-long term trend is Up, Up, Up!

Ok, if the long-term trend is up, just how high can the gold price go?

Well, based on the 1980 high of ~ $850, today's > $920 price is a new "nominal" dollar denominated high, but if you were to adjust for government published inflation figures, gold would need to be > $2,200oz to equate to the $850oz, 1980 price.

Additionally, as I've told you before, our governments published inflation stats have been understated for many years, and if the true rate of inflation were to be used in the calculation process (using the same metrics from the early 80's - metrics that have changed dramatically since -- to severely understate inflation), Gold would need to be priced ~ $5,000oz to equate the $850 purchasing power of 1980.

Looked at another way: Gold was $35 oz back in 1971 and soared to ~ $850 in 1980 ($850/35=24.2) -- so it increased in price by a factor of 24. Now, if we were to select the bottom of the last Gold bear market in 2001 and multiply $250oz by the same factor of 24, the potential upside target of $6,000oz is not unrealistic -- if the same stag-flationary environment were to return (which many predict will happen).

With all that now said, I believe the fundamentals of today's economy are much worse than those in the 70's, as back in the day we were a net exporting country, had a strong manufacturing base, had a positive national savings rate, and very little debt. Today foreigners are holding > $4.4 Trillion of our dollars, we have a $9+ Trillion dollar debt load, are running extensive trade deficits ever year, and have > $60 Trillion in un-funded future obligations.

Bottom line: I feel this Gold bull market is still in its early stages. When gold finally breaks the $1,200 mark, common investors will most likely wake up and the gold market will be flooded with new dollars. Eventually, the gold market will become a bubble itself and when that happens, it may be time to cash out.

Hold on to your hat because it's going to be a very interesting and wild ride...





Author: Randy


Disclaimer: These articles merely reflect the opinions of this author and are by no means a guarantee of future economic conditions. Though the author strives to provide accurate and relevant data, he sometimes relies on external sources and cannot assure the reader of the accuracy contained within. Additionally, these articles are provided for INFORMATIONAL PURPOSES ONLY and are NOT MEANT to provide investment advice to anyone. For investment advice, please consult with your professional financial planner.

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