Today we show that gold is still cheap and that we’re still early in the gold bull market that began in 2001. The price of gold is now roughly the price of the all time previous gold high way back in 1980 when the price reached $875 per ounce. Of course, adjusted for inflation, $875 dollars then = $2100 dollars now.
So you may be pondering the big question. Is it too late to buy gold at these prices? The simple answer is no, and let us explain why.
In nominal dollars the price of gold has recently hit a new record high. But measuring the price of gold in nominal dollars is incorrect as this price does not take into account the last 30 years of inflation and the loss of purchasing power of the US dollar. We all know that the purchasing power of the US dollar back in 1980 was a lot more powerful than it is today.
The current gold price is cheap if we adjust the current price for inflation. Estimates are that the current gold price should be between $2100 and $2300 per ounce of gold. And this price is only bringing gold back to the previous high in 1980 of $875 per ounce. Throwing in the destruction of capital, a weakening US dollar, massive debt and a mass injection of printed money, we have a recipe for a huge increase in the gold price. Back in the ’70s, gold rose from $35 to $875. This equates to a 25-fold increase in the price of gold.
This latest gold bull market started when gold was priced at $270 or thereabouts way back in 2001. So a 25- fold increase in the 2001 price of gold could take the yellow metal all the way up to $6750 USD per ounce.
A useful barometer to determine the end of a cycle is the Dow/Gold ratio. Way back in 1980, gold peaked at $870 and the Dow reached a similar level. This creates a ratio of 1. Now for this ratio to become 1 again, gold and the Dow have to meet up somewhere. To pick that point will be lucky; it could be Dow 5000, Gold 5000; it could be Dow 10,000, gold 10,000, but when you see it, that will be the time to exit a large portion of your gold holdings and transfer them possibly back into beaten down equities or strong asset classes.
In all probability, equities will be a bad name as an investment, and very few people will be talking about them, yet alone invested in them. This is what we like, as our approach is to take the contrarian point of view, and invest when the herd is nowhere to be found. Here we refer back to a famous quote. “Be brave when everyone is afraid, and be afraid when everyone is brave.”
Another way to look at where gold is valued today is by looking at the M1 money supply of US currency and deposits. We know that the US government holds approximately 290 million ounces of gold, and the M1 money supply is around $1.6 trillion. This simple ratio therefore suggests gold should be valued around the $5,500 level.
But time is running out to get into the gold market – the time to buy is not when everyone’s talking about gold and there are articles in the mainstream press and news. The “insurance premium” is cheapest when it’s less popular.
Gold is the ultimate asset, and there is no counter party risk when you purchase gold. That is, you are not relying on the fact that the other party might default as you are with bonds, options, futures, etc. Gold has no debt.
The US dollar is getting constantly devalued and slowly the world is waking up to the fact that the US dollar is a worthless piece of fiat currency that is surely to go much lower in price. There is no other way for the US government to clear its debt but lower the value of the US dollar by inflating the currency. Gold acts in an inverse relationship to the US dollar, so if the US dollar is devalued, the price of gold rises.
Gold is important because it is universally recognized as something of value. As such, it does not lose value. Yes, its price in currency might fluctuate, but this is due to the currency losing or gaining value, not the gold itself. Whereas a dollar might buy one thing today, but require two to buy the same thing tomorrow, the purchasing power of an ounce of gold will remain the same. Today an ounce still buys roughly the same number of loaves of bread as it did in Roman times. You can’t say the same about a $100 note even 20 years ago let alone two thousand!
In terms of markets, generally speaking, a bull market in a particular market sector has 3 up phases, separated by 2 down phases. The first up phase occurs when the so-called “smart money” moves into the sector.
At this time the sector is generally disliked, and only astute observers see its potential. Remember when Gordon Brown, then British Chancellor of the Exchequer sold off a large part of Britain’s gold reserves? That point served as a marker for the start of the new bull market in gold.
The second up phase begins when the big institutions (central banks, pension funds, hedge funds, high net worth individuals) start buying. While its impossible to say for certain, it seems that we
are early in this phase. The very smart hedge fund manager John Paulson, renowned for making a fortune through the housing market collapse, has recently bought large stakes in Anglo-Gold, a large South African mining company, and Kinross Gold, operating out of Canada.
The third up-phase is the so-called “mania” phase, when Larry Lawnmower and Suzie Sixpack are converting all their assets into gold.
This is the time to sell gold and buy other things, like farmland or other valuable assets going begging.