How gold could reach $13,644 an ounce and silver $853
Posted on 28 May 2011 with 9 comments from readers
Doyen of the gold bugs Jim Sinclair has set readers of his popular website a challenge to come up with the price per ounce that gold will reach if the precious metal is fully monetized. He says the correct answer is $13,644.
Mr Sinclair explains his thinking: ‘Because gold is held by many central banks, once as a reserve currency but now as an inventory currency, it functions as a swing asset to balance the International Balance sheet of the US. Central banks are sellers of dollars but still hold, by default, large dollar inventories.
Chinese hedging
‘China has hedged its dollar position 50 per cent through commitments to long term dollar commercial agreements, pay in, mineral, and energy deals internationally. That is an act of pure genius. We can assume other central banks still hold 90 per cent of their reported dollar positions, on average unhedged by commercial obligation positions.
‘In crisis times, the US dollar price of gold always seeks to balance the International Balance Sheet of the USA. Therefore, take 90 per cent of international US dollar debt less China and then add 50 per cent of the US debt owned by China. Then divide that number by the ounces supposed to be owned by the US Treasury. The result is where gold wants to go.’
Mr Sinclair says that when he did a similar calculation in 1974 that gave him a target of $900 for gold, which actually touched $850 in 1980. Will he be right again this time with $13,644 an ounce or will it be different?
Currency not commodity
What ArabianMoney likes about his approach, aside from being right before, is that it looks at gold from the point of view of an alternative currency, and not a quasi-industrial commodity. Silver should be looked at in the same light (click here). Platinum on the contrary is not and never will be a monetary metal.
You only have to ask why the Chinese authorities are stocking up on precious metals. This is an alternative currency to the faltering dollar, and euro for that matter.
For there is a crisis coming in paper or fiat money. The authorities have been issuing it by the bucketload to offset the global financial crisis. China is as guilty as the US and Europe with its incredible stimulus equal to half-a-year of GDP. It worked to the extent of unfreezing trade and credit and preventing a bigger deflation of assets.
But this nasty medicine has a painful side-effect: inflation and currency devaluation. Investors are always a bit slow to catch on but they are beginning to understand that holding currency of a fixed supply like gold and silver is the way to beat the crisis in paper money.
Gold rush
Once the general public finally gets it there will be a mad rush into this asset class and a spike in prices to levels now thought completely impossible. That might indeed put gold at $13,644 an ounce, and with the long-term average gold-to-silver ratio back to 16 that would put silver at $853 an ounce, the old high for gold in 1980.
Who knows, of course, what inflation will be by then. Certainly $13,644 will not be worth the same as it is now. You might have $5,000 gold and $300 silver in real terms at today’s purchasing power.
Equally remarkably Mr Sinclair does not expect gold and silver to crash back down from these levels as the adjustment to a new gold and silver standard will be a permanent feature of the global monetary system. And if you look back at the 1970s gold never did return back to its fixed price of $35 at the start of that decade either.
Meanwhile, the June issue of the ArabianMoney newsletter is out (click here) with more ideas on how best to invest in precious metals to capture this remarkable increase in prices. Mind you we were discussing a gold backed currency two years ago (click here).
9 Comments posted by readers:
Dear Ed,
Do you REALLY think those gold and silver prices are achieveable or is it just hyperbole ?
Ed Note: Would you have thought dot-com stocks could go as high as they did? Or house prices? This really is market forces in operation in a way that goes back to the dawn of time. The nonsense is that we never seem to think it can happen again.
China has hedged its dollar position 50 per cent through commitments to long term dollar commercial agreements, pay in, mineral, and energy deals internationally. That is an act of pure genius.
Sounds like a “wow concept” but tricky for the layman to comprehend. Does it mean that China has signed long-term agreements to buy minerals and energy priced in dollars? And these agreements are so huge that they enable China to exchange half of its US dollar holdings?
Does Jim Sinclair or anyone know how much gold the US Government actually possesses?
The point about gold at $35 raises the interesting point that within my lifetime it was once the same price as silver today. OK the gold standard was in place but even so the mind boggles…
Ed Note: These numbers do seem obtainable, have a look at jsmineset.com.
Comment by Bob – 28 May 2011
Dear Ed,
Do you REALLY think those gold and silver prices are achieveable or is it just hyperbole ?
Ed Note: Would you have thought dot-com stocks could go as high as they did? Or house prices? This really is market forces in operation in a way that goes back to the dawn of time. The nonsense is that we never seem to think it can happen again.
DearEd,
I want gold and silver to achieve Jim Sinclair’s price predictions because if they do I want to trade my gold and silver for a house. It’s the only way I’ll be able to buy one in the UK.
You forgot one thing – what about the fact that silver is heavily used as an industrial metal? Would it really stop at $853 if it turns out that the above-ground levels of silver more closely resembles that of gold, possibly even less (after COMEX has been found to be rigged by everyone)?
During the last secular bull run, Gold rallied over 2000% between 1970 and 1980 from $35 to $835. In 1970 gold’s value represented 20% of the US monetary base (bills plus bank reserves) in 1970 and peaked at 130% in 1980.
In this bull run, starting in 2001, gold increased 500%, $254 to $1500. If we hit 2000% gain gold will be over $5000. Now if you are in the camp that monetary base (dollar) will be backed by gold than the monetary base will increase from about 15% (currently the value of gold covers 15% of the existing monetary base to 100% coverage than gold price will be $10,000.
And don’t think of gold being in a bubble, rather think the US dollar creation is in a bubble and gold is along for the ride from undervalued to overvalued (the point at which you want to get).
And as much as I am a gold bull, I’m 1/3 in gold. I can tolerate a major drop with that allocation and if things don’t pan out like I expect I can survive. I think it is dangerous to be 100% exposed though I’m certain others differ on this point.
Do anyone think that governments will sit by and watch their monetary control slip away so easily, so quickly? In the past gold was forbidden private investors, and foreign investments were taxed significantly higher than domestic. That was the origins of Smoot-Hawley tariffs. No, much will happen to destroy trade and drive the world toward trade wars, maybe real wars.
As for the China dollar hedge one must recall that buying a commodity as fixed forward price is one thing, getting delivery if the commodity is radically repriced is quite another. In a fair and honest world it is textbook hedging, but in our world is has not worked well historically.
As for gold; it may rise highly, but turning into a currency that is useful in commerce, ah there is the slip between concept and functioning currency in mass economies. Gold is not currency due to its nature. But watch for local currencies, six of the states have such private currencies that can be gold backed or priced to market gold prices. That might be the future. Stay loose.
Ed Note: Loose or lose? Be careful!
Interesting commentary and conjecture here, including remarks by others. I’d like to focus on the increasing price of silver, from a different perspective, namely demand. A quick check here ( go to http://www.silverinstitute.org/silver_uses.php ) at the Silver Institute’s categories includes the following
- Traditional Use
- Industrial Use
- Emerging Use (includes medical use, water purification, etc.)
Growing Industrial Use:
As Stephanie stated above, silver is used heavily as an industrial metal; that’s an indisputable fact… not even Silver King JPM could spin that yarn to a negative. So let’s speculate a little here, and look at her estimate (i.e. the amount of “above-ground” silver) in the year 2020.
Growing Medical Uses:
There are few things in life that are “certain”, but I believe one of them is the fact that medical uses of silver will continue to increase with each passing year; let’s look at the potential. Many folks don’t realize that one of the many ancient uses of silver was as an anti-septic. Currently, the medical uses of silver as both an antiseptic and as a disinfectant are growing rapidly; what’s the potential in 2020?
What could make silver’s medical applications increase? Consider the following unfortunate facts:
a) many parts of the world will have a “water crisis” within the next few years (thereby creating more sanitation problems), and
b) many parts of the world are now experiencing food shortages, and world hunger is increasing in many countries.
These two global problems are systemic, and there’s very little that is being done to alter this course.
With increasing water crises and increasing hunger, there is the real possibility that silver’s antiseptic and disinfectant qualities will propel its medical applications even further.
The final way to demand destruction is to destroy those who demand. The
Club of Rome has divulged how that will come about. The folks perpetrating
this “solution” feel that divulging their plans, then calling them conspiracy
theories, constitutes ethical disclosure. This liberates them to implement the
plans without the burdens of secrecy, or in their minds, guilt.
The Divine injunction for all doesn’t change: See the light, or feel the heat.
There is plenty of gold and silver to provide for 500,000,000 Illuminati and
slaves.
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