The Gold Bull Is Still Charging
May 4, 2011 by John Myers
In October 2000 I became the editor of Outstanding Investments. In that first issue I told subscribers to buy gold. For 10 and a half years I have not once wavered in my advice. But I have to confess, after having recommended bullion at $284 per ounce a decade ago I have been tempted to tell readers that it is time to take profits.
Over these past couple of weeks I have contemplated what I would tell you today. And although you are Personal Liberty Digest™ readers and have only read me for two years, gold has in that time nearly doubled.
The question that has been giving me a headache: Is it time to take profits or stand firm with gold?
In considering this I thought back to some of the teachings I learned from my late father, Vernon. He told his subscribers in 1968 to buy bullion when it was $35 per ounce. He stuck with gold all the way through to its eventual high of $850 per ounce. And he watched it slip back to $680 per ounce before telling his clients to sell every ounce they had and instructed them to buy U.S. Treasury bearer notes which at the time were paying 16 percent to 18 percent.
I once asked my dad if he felt bad that he had missed the very top of the gold market. No, not at all he said. He told me how he sat back and watched other advisors sell their subscribers out early; some at a price of $100 per ounce, many more at less than $500 per ounce.
Vern also told me that you can never know the top until it has it has been reached and a decline has begun. He said that J.P. Morgan never looked for the first 20 percent profit or the last 20 percent, but was very happy to take the 60 percent in the middle.
So I list here what I think to be true:
1. We have yet to hit a top. At $1,500 gold may look pricey. But in more than a decade gold has not corrected. Technically, it looks strong.
2. Gold is cheap compared to stocks. In 1980, when gold hit its apex of $850 per ounce, investors could theoretically trade away an ounce of gold for a single share in the Dow Jones Industrial Average. Today it takes eight ounces of gold to buy a single share in the Dow (Dow 12,200 divided by $1,500 per ounce gold).
3. In inflation adjusted terms, gold is still cheap. By real terms I mean when we adjust the purchasing power of the dollar, which shows just how little of a bang for the buck we are getting nowadays. I did an inflation check on the Web (http://www.westegg.com/inflation/). An ounce of gold that may have been in your mattress and was selling for $850 per ounce in 1980 would have to fetch almost $2,500 to buy you the same goods and services that it would have bought you back then.
4. There has been an avalanche of money. Compared to fiat currency there is less gold now than ever. All the gold ever mined in the world fits in less than one tennis court cubed and has a total value of roughly $2 trillion in today’s money. All that gold is roughly worth the freshly printed money that President Barack Obama gave away to big banks, automakers and the quantitative easing program by the Federal Reserve
Miners are adding less than 2 percent to the world’s above-ground gold supply annually, while monetary numbers like M2 or MZM (the super money that the Fed lends to the banks which in turn is lent out in multiples) has been growing at near double-digit rates.
And consider this; all the gold mined this year will be worth less than $200 billion. To give you a measuring stick as to how little this is, the Federal government spends $200 billion every five days!
The numbers get even more jaw-dropping. For example, the U.S. bond market is worth an estimated $25 trillion. With just $200 billion in new gold being produced, if just a fraction of it were converted into bullion, gold prices would skyrocket.
In 2009 the World Gold Council’s Marcus Grubb pointed out that current gold investment allocation stands at less than 0.6 percent of total global wealth (see chart below).
According to Jeffrey Christian of the CPM consultancy, “Gold [has] been deprecated and reduced as a financial asset. In 1968 gold may have represented 4.5% to 5.0% of the world’s wealth… By the 1990s it was down to 0.2% of the world’s wealth.”
Now Factor In China
The market must also account for China, which has the fastest-growing economy in modern history and is undergoing major changes in the way it handles gold.
Private gold ownership was outlawed by Chairman Mao. But in 2002, the Shanghai Gold Exchange opened and started free trade in gold for the first time in the nation’s history.
In 2004, China legalized gold ownership for its citizens for the first time in 54 years. This newfound right should have a big impact on world gold demand.
Forbes.com, has reported Chinese ownership in gold totals “less than one-tenth of a gram per Chinese citizen,” far below the rate of ownership in India.
It’s estimated that the equivalent of $36 billion in Chinese private investment could move into gold in the coming years. That would be 50 percent of the world’s entire annual gold production at current prices.
On April 21st MSN Money carried this headline: “Why gold could hit $5,000.”
The article points out that analysts at Standard Chartered Bank (SCB) believe gold is in a new “super-cycle” as a number of structural factors—including U.S. monetary growth and consumer demand from Asia along with tepid growth in supply—will push prices vastly higher. Team leader Dan Smith is looking for prices of $2,107 per ounce by 2014.
But the SCB team thinks the ultimate potential is much higher. “Statistical modeling suggests a possible ‘super-bull’ scenario of gold prices rallying up to $4,869 in nominal terms by 2020,” said Smith.
I don’t know where Smith and his analysts come up with these numbers but I, too, think that gold is poised to go even higher.
Action to take: Hold or add to all your physical gold and silver positions. I wouldn’t be surprised by a $200 per ounce or greater correction in late spring or early summer. But if you are not trading in and out of precious metals and are a long-term investor, then hang tight. Five years ago I said gold would hit $2,000 per ounce. At the time bullion was around $600 per ounce, and I think many of my subscribers thought I was nuts. Yet today gold still looks strong and $2,000 per ounce remains my target.
Yours in good times and bad,
Myers’ Energy and Gold Report