For the last seven years, Jim Sinclair has written that gold WILL HIT $1,650. It is the seventh gold bar from the bottom on his Angel chart. Note that $1,650 is NOT the high. The Angel is pulling on gold with a target of $2,025. And what will it take for the Angel to pull gold to $2,025? Just a little more patience, my friends. Just a little patience.
I am often asked how high I think gold will go before the bull market comes to an end, somewhere between 2015 and 2020. There are some hefty numbers floating around by some of the “experts” that suggest $3,000, $5,000 and even $10,000 but the numbers are not helpful, taken by themselves. Gold’s value, or purchasing power is “relative” to something else – say the Dow or to inflation.
For example, it now takes 8.6 ounces of gold to “buy” the Dow and it took more than 40 ounces of gold to buy the Dow just 10 years ago. The “buying power” of gold has increased nearly five times compared to the Dow.
When I built my house in the fall of 2005, gold was $500. I could “buy” my house for 2,000 ounces of gold, or I could take out a mortgage. I took out a 10-year, interest only fixed mortgage and kept the gold. Today, I can pay off the mortgage with around 730 ounces of gold. Gold, in my estimation, will reach $2,000 this year and I will be able to pay off my mortgage for 400 ounces of gold. If gold peaks out at $3,000, which I believe is a conservative estimate (at least it is conservative from people within my industry), then I will be able to pay off my house with 333 ounces of gold.
The price of gold is meaningless, unless it accounts for the change in the dollar’s purchasing power and that is why rational people accumulate gold – to preserve future purchasing power. What if five years from now the US dollar only buys 20% of the goods and services it buys today? In this example, gold would have to be around $7,000 to maintain its current buying power. So there would be no “gain” in gold unless you referenced it to a constant debt load, like my mortgage. I could pay of the mortgage on my house with just 143 ounces – and guess what, my mortgage comes due in five years. Another advantage is that the interest on my mortgage (most of it) is an interest deduction on my tax return. As I hold off paying up my mortgage, Uncle Sam is paying over half of my monthly “rent check” on my house.
Recently, I had to provide a $100,000 letter of credit to Pay Pal in order to continue offering gold and silver on EBay with a Pay Pal payment option. I could have sold 72 ounces of gold, put the proceeds into a CD, and given it to our bank for the letter of credit. This makes no sense (to me). Instead, I gave my banker 140 ounces of gold to hold as collateral, and with the gold in hand, he gave me the letter of credit. Notice I said 140 ounces, not 72. Bankers still do not want to admit that gold is as good as or better than cash. My banker needed a cushion in case gold “fell.” That’s O.K. It is safely stashed away in his vault and covered by his insurance and that is a good place for it to reside – for now. When gold doubles or triples, and I suspect that it will, I will sell 25 or 35 ounces, put the proceeds into a CD, give my banker the CD and take back the remaining 100+ reounces. More than 100 ounces will be “free.” That’s the way I use gold. As gold rises, it takes less to pay up “constant” debt. Take advantage of that fact.
I often express the value of gold in terms of how many ounces it takes to buy the Dow. I have pointed out that twice in the past, one ounce of gold bought the entire Dow. It happened in the early 1930s (gold and the Dow at 35) and again in 1980 (when both gold and the Dow were 850). Richard Russell believes the ratio will reach 1 to 1 or 2 to 1 before the bull market is over. At 2 to 1, if gold is $7000, the Dow would be 14,000. But the Dow would not have gone up more than two times its “real” current value, it will have lost three quarters of its value, when measured by the price of gold. Gold is “adjusting” for inflation. Gold is the standard. Rising gold is a warning that the buying power of our dollar is tanking.
The more the dollar falls in value, and that is unquestionably the way things are headed, the higher the price of gold will be. So don’t worry how high the price will go – just be happy you are staying ahead of the game by stock piling gold instead of dollars. And if you have long-term debt at a fixed rate, like my home mortgage, gold is a great way to reduce the obligation, as the bull market powers ahead.
Before moving on, here is a quote from Bob Chapman that really nails it!
“In the early 1960s we fortunately were able to see what lie ahead for the dollar and the monetary world. In 1964 we saw inflation start to spin out of control. That was the year the US removed silver from its coins and began the trek to abandonment of the dollar on August 15, 1971 and the inflationary blow off of 1980. The actions that began in the early 1960s led us to where we are today. The system has been looted. Americans and Europeans are being traumatized by a failing system, which has been engineered to bring about world government and the total enslavement of mankind. Over all those years, more than 50 years we have advocated that the system was indeed meant to collapse and that the only safe place to be, which is for financial salvation, was to be in gold and silver. It has certainly turned out that way.”