Author Archives: Administrator

$1000 Gold is in the Future

I have been bullish on gold for several years now. Even though the gold price has had a tremendous run from $260/ounce in 2000 to its current price of $615 the underlyng factors responsible for the rise remain present. Because of this I am fully invested in gold even though I have already made a lot of money.

My current target price for gold is around $1000/ounce. I am not sure exactly how long it will take to reach that price, but it should happen before the end of this decade. So if you were to buy gold right now for $615 and sell it 3 years later at $1000, you would have made 63% or 17.5% compunded annually. And you would have made much more than that if instead you had bought shares of gold mining companies with leverage to the gold price.

Now let me explain why the gold price will increase to $1000. When most analysts make predictions about the gold price they talk about jewelry demand, producer hedging, central bank sales and mine supply. However, when one charts the relationship between these factors and the price of gold no relationship can be found. Rather, it is currency exchange rates that influence the price of gold.

gold_dollar_relation

The chart shows a very strong inverse relationship between the US dollar gold price and the US dollar exchange rate measured against a basket of major currencies. An obvious explanation for this is that since gold is quoted in US dollars, when the US dollar weakens more of it will be required to buy the same amount of gold.

This makes sense since gold has historically been considered money and, therefore, is affected by exchange rate changes like other currencies such as the Euro, Yen and Pound. Gold does not respond to supply and demand factors like other commodities and this is why most analysts make incorrect forecasts about the gold price.

To correctly forecast the theoretical US dollar price of gold we need to measure the inflation rates of the US dollar and gold. Paul Van Eeden has measured both and comes up with a theoretical price of $700/ounce (now updated to over $900/ounce). Moreover, if the US suffers a recession, as I expect, then the Federal Reserve will pump liquidity into the economy which will cause dollar inflation to accelerate and the theoretical gold price to rise beyond $1000/ounce.

In conclusion, the current gold price of $615/ounce is much less than its theoretical value of over $900/ounce. Since gold is so undervalued it is the safest investment I am aware of and it is where I have deployed most of my capital.

Next Fed Move Will Be a Cut

My belief is the Fed has ended its current rate hike campaign and will begin cutting rates sometime this year or early next year. James B. Stewart of SmartMoney.com points out that history supports my belief:

History may also be instructive. With all this talk of a pause, I was curious to see just when the Fed last paused in a rate-raising campaign, in the sense that it stopped increasing rates for one or more meetings, and then resumed. I looked at every Fed rate decision since 1914, and guess what? The Fed has never paused in a campaign to raise rates. Sometimes it has held rates constant for several meetings, but the next move has always been a cut. Pauses aren’t unheard of — they occurred three times, in 1999, 1994 and 1988. But these all happened in periods of declining rates.

As the pop of the housing bubble trickles through the economy, expect weaker economic numbers to be revealed over the coming months. Then the current talk of a rate hike will give way to talk of a rate cut.