How High Can Gold Prices Go?

The price of gold continues to go up, and many experts expect the trend to continue. While gold isn’t intrinsically safer or more valuable than any other commodity, …

The price of gold continues to go up, and many experts expect the trend to continue. While gold isn’t intrinsically safer or more valuable than any other commodity, countries continue to increase their gold reserves as the threat of inflation increases. For more on this, see the following article from Money Morning.

Gold was all the rage again last week. But why is it rising, and does anyone really know what it’s worth?

According to the way I calculate momentum, gold has just barely entered the gravity-free zone – where it has the potential to start advancing a lot, with much more fluidity.

And that translates into much higher prices.

Although I normally abhor such popular and trendy positions, the trend-following rules in my asset-allocation models are screaming for a higher weighting than the current 5% in the portfolios that I track in my Strategic Advantage newsletter.

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The London Telegraph had an interesting analysis on Thursday, based on an interview with Dylan Grice of Societe Generale SA (OTC ADR: SCGLY). The French analyst said the recent jump related to the purchase of a massive amount of gold by the Indian central bank was very similar to the French central bank’s effort to convert dollars to gold in 1965, the slippery slope that led to the collapse of the Bretton Woods currency agreement and the close of gold sales under U.S. President Richard M. Nixon.

Grice recalls that, in the wake of the French move back then, the price rose to a level that matched the U.S. dollar monetary base and peaked at 140% of that amount. If that were to recur, Grice said, in the wake of the big money print exercised by the U.S. Federal Reserve under Chairman Ben S. Bernanke, gold would have to reach a little more than $6,400 an ounce. (The calculation is simple: The monetary base is $1.7 trillion and the United States owns 263 million ounces of gold. Divide, and voila!)

Could this happen? Well don’t let anyone fool you. Gold is almost completely worthless except to the extent that people of an era like to own it, and as such it has varied wildly in price over the years.

Grice notes that is trading at roughly the same real price now as in the mid-1400s, when an ounce bought a light suit of chain mail. It then doubled in the Medieval bubble – yes, they had bubbles back then, too — then crashed 90% over the next 500 years once the Spanish discovered scads of gold in the New World and there were a few minor finds in places like California, Australia, South Africa and Russia.

Grice told the Telegraph: ”Gold isn’t intrinsically safer than any other asset. There is nothing mystical about it, either.” And yet its uselessness is part of its charm, making it almost the perfect currency in a time of inflated paper money.

Considering that virtually all major Western nations and Japan are insolvent now, with far more debt than gross domestic product (GDP), you can see why emerging countries like China and India, which have not yet advanced to the point of bankruptcy, would want to get their hands on it. Every generation will value things that are important to it differently. Back in the heyday of Holland, tulips were more valuable than gold for instance; and in the heyday of the Internet bubble, you could get financing for a startup company based on a multiple of clicks and eyeballs.

On Wednesday night, a friend in the hedge fund business told me about a dinner hosted by Goldman Sachs Group Inc. (NYSE: GS) in London last week where the subject of gold’s value came up. Goldman asked the room full of 15 or so major hedge fund managers to mark down on a piece of paper the price at which they thought gold would trade over the next two years. The consensus answer was an astonishing $4,000 per ounce.

Whether that’s the right number or not, it’s clear that gold has become the most loved instrument in the world of late. I really don’t think it has moved into bubble territory yet as it is mostly just discussed in these terms by wizened gold bugs with stains on their shirts, shady Vancouver Exchange stock promoters and hedge fund muckety mucks. Once my sisters and neighbors start asking where they can bogart some bullion, I will call bubble, and not before.

This article has been republished from Money Morning. You can view the full article at
Money Morning, an investment news and analysis site.

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