Gold’s Ascent Is Fuelled by Dollars Decline, but How High Can Gold Go?

[MadMarketScientist 11]

In January of this year the gold bull market had its 10th birthday. Investors who’ve had the patience and fortitude to hold gold since 18 January 2001 when it made its low of $257 have been richly rewarded since today the yellow metal trades at $1,784 an ounce.

 

A 7 fold move in a little over a decade certainly isn’t bad but given that this bull market shows no sign of stopping, the question is: How High Will Gold Go?

 

In order to answer this question, it’s first necessary to understand what’s driving gold.

 

What’s Driving Gold?

Gold has two primary drivers, currency debasement (which shows up as inflation), and interest rates.

 

Currency Debasement

As a response to its unsustainable levels of state and federal debt, and in an attempt to stimulate economic activity, the United States has adopted a deliberate policy of currency debasement.

 

As with any market currency prices are set by supply and demand and as the Federal Reserve creates more dollars their value falls, and since gold is denominated in dollars, as the dollar falls, so the price of gold rises. Gold then is the anti-dollar, and gold’s decade long advance runs counter to the dollar’s decade long decline.

 

Back in 2007 the US dollar index [DXY] broke down through 80 – a level which had acted as support for 34 years – and with the likelihood of QE3 not too far away, the outlook for the buck is distinctly negative. In fact, famed technical analyst Louise Yamada, has a long-term downside target for the DXY of 60.

 

Mark Hanney, Valbury Capital Chief Executive Officer, says “Given the Fed’s announcement that it will keep interest rates low until at least the middle of 2013, investors who are long gold and short the dollar might well feel comfortable staying that way.”

 

It is just over 40 years since Richard Nixon took America off the gold standard and over that period the greenback has lost more than 98% of its value compared with gold. Buyers of gold are simply trying to protect their wealth by moving out of paper currencies into the ultimate hard currency that cannot be created at will by central bankers. The question of how high gold can go is really a question of how low paper money can go.

 

Interest Rates

Gold becomes attractive to investors when the rate of return they can achieve on their savings falls below the rate of inflation – a condition faced by most of the world’s savers today. The persistence of negative real interest rates – a form of financial repression – erodes the wealth of those holding cash on deposit and forces them to go in search of better returns. The attraction of gold in this environment is easy to see especially since gold has risen for 10 years in a row and has returned on average 18% with no down years.

 

A Different Animal

Although some of the conditions that drove gold in the 1970’s also exist today – namely high inflation and negative real interest rates – today’s bull market is a very different animal. Today gold is also being driven by fears over sovereign debt default, the solvency of the banking system and the threat of global recession.

 

Inflation Adjusted High

One popular method for calculating the target for gold is to take the 1980 high of $850 and adjust it for inflation. Many in the mainstream tout the inflation adjusted figure as being equivalent to $2,400 an ounce in today’s money but if we use the same methodology for calculating inflation as was used in 1980, we find the true inflation adjusted high is $5,467.

 

The Last Gold Bull Market

Another way to gauge the length of gold’s current bull market is to compare it with the previous bull market which ran from early 1970 to early 1980, exactly one decade. In January 1970 gold was $35 an ounce, ten years later on 21 January 1980 gold reached an intraday price of $850 – a 24 fold increase in price. If gold were to match that increase, based on its January 2001 low it would reach $6,245.

 

Even if gold simply achieves the gains made in the previous bull market, we can expect a price in excess of $6,000 an ounce. However multi-decade bull markets almost always end in a mania and in a mania gold could far exceed $6,000.

 

 

Article syndicated from http://www.valburycapital.com

 

Valbury Capital Limited was established to provide Asian clients with a London based broking service fully regulated by the FSA, and to give European clients a doorway into Asia - one of the world’s fastest growing marketplaces. Valbury Capital’s investors bring with them over 20 years’ of corporate experience and their Asian heritage gives it unique market insight and expertise. Valbury Capital Limited focuses on providing individuals and institutional clients with a premier service.

[Tradewinds 12]

and since gold is denominated in dollars, as the dollar falls, so the price of gold rises.

 

What would happen if gold were denominated in some other currency?

[MadMarketScientist 11]

What would happen if gold were denominated in some other currency?

 

It could work, just as its been working denominated against the US dollar for the last 50 years or so. Problem is ... which currency would you pick? euro?

 

But no matter which one you do, the ones in power will always spend and print money they don't have. Its happened throughout history and is happening right before our own eyes with BOTH the euro and the USD

 

thx

MMS

[Tradewinds 12]

... which currency would you pick? euro?

 

Let China's currency denominate gold. Actually, this brings up another interesting subject. Do we need a neutral world currency? The "Euro" of the entire world. If a particular currency being associated with gold causes that nation so many problems, the argument could be made that we need an international valuation system.

[izzahmu 10]

I wouldn't be surrpriced if we reach or top $5,000 the dollar after all is going to loose another 50% of its current value which would justify $4k, but these things shoot up and I wouldn't be surprised if we go above $5,483.43

[r4bb1t 10]

According to Dow/Gold Ratio (which is relative strength) Random Roving: The Dow Jones Industrial Average / Gold Ratio: The Mathematical Relationships

currently down trend (dow weak and/or gold strong) is in process.

basically if dow plunges this ratio will go down quickly. which means gold can't go up much

relatively if dow holds current level at least. gold can go up. hench dow down+gold up makes this ratio plunge like these days.

it works like Put-Call Parity relationships. of options structure.

in purely technican's point of view. i can say that this dow weak/gold strong tendency may continue up to 2 years more.

because this Dow/Gold Ratio didn't reached the historical bottom yet.

since it's forming expanding triangle pattern.this tendency may be extended over 3 years.

Edited September 18, 2011 by r4bb1t

[izzahmu 10]

Dow is not going to hold these levels, we might even go above 14000 on dow within 12 months from now or even a new high but its not going to hold.

The economy is out of steam and something really big needs to happen to keep us above Dow 14000, something similar to the tech revolution or the gold rush, something really big; anything less than that is not going to work, and we will be going down to a deeper correction than that of 2 years ago. Oh, and by the way, no the republicans are not going to be able to fix the econ if they win next election.

[Qiman 10]

I would say that gold's ascent is fueled by the rapid increase in the printing of money by most leading economies and the declining faith in fiat currencies. I don't have time to locate them right now, but I have seen some great charts showing gold's value in terms of most of the leading currencies. Gold has been setting records in most currencies, not just the dollar. So far at least, you can't print gold!

[jackb 10]

Let China's currency denominate gold. Actually, this brings up another interesting subject. Do we need a neutral world currency? The "Euro" of the entire world. If a particular currency being associated with gold causes that nation so many problems, the argument could be made that we need an international valuation system.

 

It will be interesting to see how Bitcoin does in this regard.

[Qiman 10]

The dollar factor also breaks down on some trading days, where both the dollar and gold rise in tandem as "safe havens." In addition, so many Western commentators and pundits ignore the single largest factor in gold's ascent: The rapidly growing wealth in Asia, which has led to an expanding pool of people who can afford small amounts of gold here and there. This is aided by state policies in China which now encourage the accumulation of gold by the populace. The net effect is that the public demand for gold is much stronger than several years ago, to say nothing of various central banks accumulating the yellow metal. Combine this with the fact that the easiest deposits to mine are mostly long gone, and you have the classic case of growing demand and shrinking supply.

[PeterBrazel 10]

Maybe the Government should take back control of the money supply. This is the only way that reform could begin. Right now it is the Central Banks that control Government policy and that policy offers bankers protection against their own greed and incompetence. The result is runaway inflation,unemployment and as already discussed currency devaluation.

 

The only two Presidents of the US who tried to take control of the money supply were assassinated which either directly or indirectly resulted in "business as usual".

 

The Govt continues to blame traders for all the financial woes and want to legislate against traders who are all "bad guys" for causing all this financial strife. Will those who believe anything the Government says please raise their hands!!!

 

In the meantime turn off the tv buy Gold and grow your own vegetables

[Kojak 10]

There is another fundamental reason for the rise of Gold: Gold is an investment of last resort. In times of extreme uncertainty, at the margin, large investors necessarily move a certain portion of their investments into gold.

 

This closely parallels the US dollar's status as a currency of last resort. When there is turmoil, investors necessarily move funds into dollar denominated securities. Ironically, this is the reason why, when the US credit rating was downgraded, the dollar climbed against every conceivable currency. More funds flew into dollar denominated securities.

 

Another reason why Gold prices can be expected to remain buoyant is because of the increased volatility. Volatility increase can be traced to a host of reasons, oil prices, terrorism, weather and the acceleration of technological change. Once the global economy, especially the US economy starts to stabilise, you can expect a rapid drop in gold prices as money moves back into real investments.

 

Looking at it that way, long term Gold prices are a call on the performance of the US economy. If US economic performance is in the process of bottoming out, then gold prices have peaked.

[MightyMouse 11]

Gold is a metal and a commodity. It's price rise and fall is a result of supply, demand, and speculation. With all commodities, eventually supply increases.

 

It's price ascent is a result of speculation. It could continue higher for years for all we know. After which we will all realize that it was part of one big bubble.

[izzahmu 10]

There is another fundamental reason for the rise of Gold: Gold is an investment of last resort. In times of extreme uncertainty, at the margin, large investors necessarily move a certain portion of their investments into gold.

 

This closely parallels the US dollar's status as a currency of last resort. When there is turmoil, investors necessarily move funds into dollar denominated securities. Ironically, this is the reason why, when the US credit rating was downgraded, the dollar climbed against every conceivable currency. More funds flew into dollar denominated securities.

 

Another reason why Gold prices can be expected to remain buoyant is because of the increased volatility. Volatility increase can be traced to a host of reasons, oil prices, terrorism, weather and the acceleration of technological change. Once the global economy, especially the US economy starts to stabilise, you can expect a rapid drop in gold prices as money moves back into real investments.

 

Looking at it that way, long term Gold prices are a call on the performance of the US economy. If US economic performance is in the process of bottoming out, then gold prices have peaked.

 

Sure its a call on the US economy performance, and marginally on Europeans also. I guess the question becomes do you think western economies are out of the critical care unit. I happen to believe they are not. And actually the x-rays are going to come back worse than expected and that alot more work inside the critical care unit is required. With that said Gold is going up in the next foreseeable future, and $5000 target might even be conservative!!!

[izzahmu 10]

Gold is a metal and a commodity. It's price rise and fall is a result of supply, demand, and speculation. With all commodities, eventually supply increases.

 

It's price ascent is a result of speculation. It could continue higher for years for all we know. After which we will all realize that it was part of one big bubble.

 

Sure a run to safety would create a bubble, and smart investors should get in the bubble early, and leave early into the next forming bubble before others. The next push up should be real assets as currencies deflate. Real estate inparticular and good corp stocks should see the light at the end of the tunnel and start moving up again.

[MightyMouse 11]

Sure a run to safety would create a bubble, and smart investors should get in the bubble early, and leave early into the next forming bubble before others. The next push up should be real assets as currencies deflate. Real estate inparticular and good corp stocks should see the light at the end of the tunnel and start moving up again.

 

You could be right. I have never done well trying to predict anything's path. I leave that up to others to do. I am interested in the direction only with no interest on where it should be going.

[izzahmu 10]

In reference to my previous post, I am not promoting getting into real estate now, its not time yet. The gold rush and currencies deflation needs to take place and then as gold peaks and currencies lose a good chunck realestate would be ready.

I don't claim to be an expert either, I am only an observer of markets and a trader.

[Kojak 10]

Sure its a call on the US economy performance, and marginally on Europeans also. I guess the question becomes do you think western economies are out of the critical care unit. I happen to believe they are not. And actually the x-rays are going to come back worse than expected and that alot more work inside the critical care unit is required. With that said Gold is going up in the next foreseeable future, and $5000 target might even be conservative!!!

 

....maybe its time to take a contrarian view on the US. A slim sliver of hope is the entrepreneurial dynamism which surfaces, in times of desperation. If anybody can pull that one off, it is the US of A. Not Europe. Not Japan or Germany. The spoil sport in my view would be the 'tea party' Republicans. Just a hope.....

[zdo 20]

..... The spoil sport in my view would be the 'tea party' Republicans......

 

Are you saying 'tea party' 'republicans' would be an impediment? How?

[izzahmu 10]

Are you saying 'tea party' 'republicans' would be an impediment? How?

 

What we have now, no one can fix, no words, not hope, not trust, not the fed, and certainly not the tea baggers.

Where we are is the results of favoritism to corps that shipped jobs and tech overseas. Shipping jobs means shipping peoples incomes, income the should have been earned and spent here. These are policies that elephants hold dear and close. Democrates say they are against such policies but they never did anything to push back. So yes its the elephants ideas are what brought us hear, however the other part, which shall not be named, never did enough to stop such policies they gave the American people lip service but nothing other than lip service.

[MightyMouse 11]

What we have now, no one can fix, no words, not hope, not trust, not the fed, and certainly not the tea baggers.

Where we are is the results of favoritism to corps that shipped jobs and tech overseas. Shipping jobs means shipping peoples incomes, income the should have been earned and spent here. These are policies that elephants hold dear and close. Democrates say they are against such policies but they never did anything to push back. So yes its the elephants ideas are what brought us hear, however the other part, which shall not be named, never did enough to stop such policies they gave the American people lip service but nothing other than lip service.

 

They are all on the same side and there is only one side. You make it sound like the democrats are defenseless victims and the republicans are evil omnipotent villains. Don't kid yourself. If you really want to help. start refusing the benefits that you receive for free from your government.

[Kojak 10]

[/HIGHLIGHT YELLOW]

Are you saying 'tea party' 'republicans' would be an impediment? How?

 

Very simply put, more than everyone else, its the tea party republicans who refuse to the radical changes that are needed. Its more difficult for them actually.

 

Like:

 

The need for the US not to go protectionist. It cannot take an "isolationist" stance in an increasingly intricately interdependent global economy. That would be disastrous for the US economy and the world at large.

 

As Nouriel Roubini put it : "..... we must accept that austerity measures, necessary to avoid a fiscal train wreck, have recessionary effects on output. So, if countries in the eurozone’s periphery are forced to undertake fiscal austerity, countries able to provide short-term stimulus should do so and postpone their own austerity efforts. These countries include the United States, the United Kingdom, Germany, the core of the eurozone, and Japan. Infrastructure banks that finance needed public infrastructure should be created as well." This is definitely not in the grain of what the tea party republicans advocate.

 

The US will have to abandon the Ponzi type of structure in its financial systems, sooner than later. Again, the US will never again have the hegemony it once had in the global economy. The US will have to compromise and sometimes even bend... tough decisions for anyone, especially the likes of the tea party republicans. But bite the bullet it must or it would be disaster for all.

 

So it really boils down to two alternatives a) the tea party stance b) the accommodating stance. If it is the former then a double dip recession[HIGHLIGHT YELLOW] is almost a certainty and gold prices will climb even higher. If its is the latter then we will soon enough a bottoming out of the recession and then alone can we predict the peaking of gold prices

 

Its a political decision and whatever the outcome, it will be a longish and painful grind.

Edited September 23, 2011 by Kojak

[zdo 20]

Where are ya'll getting your definition of the 'tea party' from? Thx.

[mohsinqureshii 10]

Although some of the conditions that drove gold in the 1970’s also exist today – namely high inflation and negative real interest rates – today’s bull market is a very different animal

 

 

What if gold Drop then what will be the facts..i just wanna know in detail.

[bj139 10]

[/HIGHLIGHT YELLOW]

 

Very simply put, more than everyone else, its the tea party republicans who refuse to the radical changes that are needed. Its more difficult for them actually.

 

Like:

 

The need for the US not to go protectionist. It cannot take an "isolationist" stance in an increasingly intricately interdependent global economy. That would be disastrous for the US economy and the world at large.

 

As Nouriel Roubini put it : "..... we must accept that austerity measures, necessary to avoid a fiscal train wreck, have recessionary effects on output. So, if countries in the eurozone’s periphery are forced to undertake fiscal austerity, countries able to provide short-term stimulus should do so and postpone their own austerity efforts. These countries include the United States, the United Kingdom, Germany, the core of the eurozone, and Japan. Infrastructure banks that finance needed public infrastructure should be created as well." This is definitely not in the grain of what the tea party republicans advocate.

 

The US will have to abandon the Ponzi type of structure in its financial systems, sooner than later. Again, the US will never again have the hegemony it once had in the global economy. The US will have to compromise and sometimes even bend... tough decisions for anyone, especially the likes of the tea party republicans. But bite the bullet it must or it would be disaster for all.

 

So it really boils down to two alternatives a) the tea party stance b) the accommodating stance. If it is the former then a double dip recession[HIGHLIGHT YELLOW] is almost a certainty and gold prices will climb even higher. If its is the latter then we will soon enough a bottoming out of the recession and then alone can we predict the peaking of gold prices

 

Its a political decision and whatever the outcome, it will be a longish and painful grind.

 

Do you even realize what you said?

Don't you know the tea party is against the Ponzi type structure of more stimulus.

 

You stated if we have austerity (less money printing) with the tea party republicans, gold prices will climb even higher. After that you said if we have an accommodating stance (more money printing), gold will peak and head down. Are you standing on your head? You seem to have things upside down.

 

If you check out past history when government spending was cut, in 1920 and in 1946, the doomsayers predicted the end of the economy. The economy actually improved greatly thereafter. Our government is actually prolonging the recession the way FDR did with wasteful spending. Of course the politicians can't cut government spending since this would reduce their power. We all know that their welfare is more important than the health of the economy and the ability of the American people to find jobs.