Wednesday, January 30, 2008

GOLD -- How High?

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:

  • The US Housing bubble has finally burst and is expected to get much worse
  • Our financial/banking system offloaded too much toxic paper (mortgage backed securities and derivatives of such) to foreigners and investors who have been burned badly & are not happy about it.
  • Banking system write-downs have been massive thus far and more will follow
  • Credit markets are locked up and mortgage lending standards have tightened dramatically; the negative consequences are expected to cross over to auto loans, credit cards, etc later this year
  • Fed Chairman Bernanke and the PPT team (led by Treasury Secretary Paulson—previously CEO of Goldman Sachs and a Treasury “Plant”) have panicked and have sacrificed the dollar in an attempt to bail out our financial/banking systems -- By lowering rates 125 b.p. in just 8 days, at a time when the dollar is at its weakest point in history, should be proof enough of their priorities and loyalties.
  • Deflation is on the horizon and therefore the Fed will make every attempt to INFLATE (print more money and inject it into the system—continuing to devalue our currency)
  • Foreign dollar holders are working to diversify their holdings—among other things, in different currencies, commodities, energy & gold
  • 43 of the world’s largest stock indexes, from around the globe, have officially entered “Bear” Territory in early 2008
  • There is wide-scale pressure afloat to price oil in currencies other than the depreciating US Dollar
  • OPEC nations are seriously discussing the need to de-peg their currencies from the dollar, as inflation internal to their domestic economies has been raging out of control
  • Investors are fleeing volatile markets and are seeking security in gold

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…




Anonymous said...

Gold is unvalued no doubt about it.

People in their majority have been brainwashed to disregard gold for a very long period.

Those interested in gold are moved more by sentiment, having no other solution than regard it as a catastrophy insurance premium, relying on instinct and experience.

So only the sky is the limit, and none really knows for sure.

Thai said...

Interesting post, though your basic point is inductive reasoning and therefore highly vulnerable to Black swans.

I tend to agree more with Mark Twain: "History doesn't repeat itself, but it often rhymes"... Meaning I agree with your basic view, that there are many interesting reasons to own a little gold, but don't kid yourself that it comes without significant risk.

John said...
This comment has been removed by the author.
John said...

Risk indeed. Could the shorters win?

The Double Whammy of Geopolitical Global Gold Games

Matt said...

How can I invest in gold? I'd rather not get into an ETF. Should I purchase stock in Randgold or another gold miner?

Randy said...


Agree the sky is the limit. My figures below don't account for future inflation/dollar devaluationevent. Lets say the dollar is halved in value during the next 5 years. Now double the figures below.


Agree a Black swans event could change everything. BTW: I never stated Gold is risk free.


Read that article this afternoon. Very interesting perspective. Yes, the Chinese think long term and the theory presented could be possible--they have us by the cajones.


See the link "Buy Gold on the right side of my Blog. Very reputible,folks.


I'm sorry to be so short, but just got home from work and it's my anniversary and it's out to dinner--We're late.

Thanks to all for posting up


Anonymous said...

I've been a goldbug for the last 5 years and I agree with the points you have made in the main article. In other forums I see people talking about the manipulation of the gold price by central bankers to shore up the dollar. What is your take on this? I'm not too concerned about this. I was just curious.

As far as how high?? I say all bubbles end in a frenzy, like the dot-com bust and now the housing bust. So how will I tell when we reach that stage with gold? If I happen to go to a party and people start telling me how much gold they got and that I should invest in gold, that will be the time to pull the plug.

Right now I sleep well at night knowing I am holding Au instead of depreciating fiat.

Randy said...

24 Karat,

regarding your question on manipulation of the gold price by central bankers to shore up the dollar.

ABSOLUTELY, they have been doing it for years, but they are finally beginning to lose control. I just hope, when they do lose control, that we don't end up with new Gold Confiscation laws.

I also sleep well thanks to Au.

Appreciate your thoughts--thanks for posting up


John said...

Can any of you tell me about your experiences in selling physical gold?

Obviously there are benefits in owning physical gold over the GLD ETF if the blank hits the fan. But my financial advisor is warning me about the difficulty and expense of selling physical gold coins.

I like the idea of physical ownership more so than the GLD ETF. But out of curiosity, let's say gold is $900 an oz on Monday and I buy some pre-1933 European coins. If I sold them on Tuesday (assuming the price stayed flat at $900, what kind of loss would I incur from the transaction?

If gold does skyrocket in the coming years/decades then obviously this is a moot point. But I'd like to have a sense nonetheless. I am sure the GLD ETF is more efficient. But by how much?

John said...

James Turk has some strong concerns about the GLD ETF:

Matt said...

I would love to buy physical gold. But I can't afford it. Most gold sellers have a $2g minimum and I can't swing that. Does anybody know about Central Fund of Canada (CEF)? I have been looking into them and monitoring the stock.

John said...

Never mind. I figured out pricing. And ETFs do not serve any purpose against a currency crisis. Accounting/inventory for GLD etf looks moderately suspicious as well.

Price calculation
spot price x weight = melt price.

British sovereign circulated (pre-1933 European).

weight = .2354 oz
spot price = $900
Melt price = .2354 x $900 = $211.86

The key is to get as close to the melt price as possible.

John said...

Does anyone think Gold has any shot at coming back down to $860 soon?

Randy said...


Thanks for posting up and sorry it took so long to reply. I've been out of town and didn't have email nor internet access.


Regarding the selling of physical--it's very easy but you will always have a spread (the price at what a dealer sells and the price at which they will buy). Take a look at these reputible folks:
Golddealer (CNI)

If you scroll down the page and look at 1oz gold eagles, their "Buy" price (that at which you can sell them) is $923 today. However, if you were to buy from them today, you will have to pony up $941 for that same coin (an $18 spread). I would HIGHLY suggest you stay physical (and hold for the long-term).


I suggest you look up a local coin dealer and buy smaller amounts. You should be able to buy 1/10oz gold coins (Eagles and such) for ~ $100 each. Call around your town. You can even check out pawn shops and offer them spot prices.


Regarding your $860 question--possibly, but then again, it may shoot to 1,000 and never come back--no one knows, but if it does shoot to $1K and you failed to buy when cheaper you'll be kicking yourself in the rear end.

I know it's a tough decision, but what is $50 bucks an ounce when a few years from now, we will see daily moves in spot larger than this.

Best of luck! BTW: If you happen to order from CNI, ask for Ken Slater--he's the best and won't steer you wrong...

John said...

I have been banging my head over this for some time. But I think Gold's parabolic rise demands a correction soon. I am sitting on the sidelines and taking my chances for now. But long term Gold looks great.

I have been going back and forth over the type of bullion coin to buy. The more I read, the more I think the confiscation risk argument for pre-1993 coins is a scam.

So, what kind of standard bullion coin should I buy? The more I think about it the more I like Krugers. They are the cheapest coin, closest in sell price to the melt price. If an enconomic calamity strikes, I doubt any one will care about nicer looking coins such as eagles, buffaloes and Maple Leafs, etc which get a higher premium. All that will matter is gold content. So Krugers strike me as the way to go.

Any thoughts?

John said...

FYI. I meant pre-1933 coins of course.

Randy said...


Thats a tough call but your thoughts on the Krugers are spot on.

Personally I own Swiss Francs, American Eagles, Austrian Philharmonics, PCGS MS-64 and 65 Graded St Gaudens and a wide variety of Silver Products.

Ultimately it's a personal decision, but for Pre-1933 Coins I like the Swiss Francs: .186oz coins currently running ~ $180 a piece at


Randy said...


One More Thought: NEVER Buy Gold From Commissioned Sales Folks,as They will try to push you into the products with the highest profit margins. Thats why I use Pressure and No Commission

Anonymous said...

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Any thoughts about I found this website and it seems reliable enough. Please let me know if you identify anything wrong in this website before I put too much money in it.

Randy said...


I've never used bullionvault but have heard nothing but good things from Goldbugs posting in other forums: Itulip, 321Gold, Dailyreckoning, etc.

Anonymous said...


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Apart from that I really got the 1gr gold for free, I find the online help is really useful, I also find that the bidding concept is really helpful on getting the gold in the price that I wanted. Initially I bought the gold on the top price (about $925) but now I manage to get the average price lower down to $909 as I can bid on the low price (today I got the gold on $900/toz).

If this goes very well (including the security), I believe this could be the answer for you all. BV allows us to store our gold in Zurich (swiss) who protects our property from confiscation.

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John said... (CNI) offers the best prices in the US from what I could find. And given that Randy has good luck with them, I'll be using them as well.


Gold will move higher and higher.


Great old gold.