mamboni
16th August 2012, 06:33 PM
The Gold Price for the Next 16 Years
Dr David Evans
Posted Aug 16, 2012
The high rate of debasement of paper currencies ensures the gold price trend will be solidly up until interest rates rise sharply, to maybe 15% in 2028.
Gold is monetary. It is the main non-government currency, evolved in the marketplace over 5,000 years.
the rest at http://www.321gold.com/editorials/evans/evans081612.html
Key excerpt:
Gold
Gold enforces honesty, because you have to earn it before
you can spend it. No one can conjure it up for little effort, and even digging
it out of the ground often takes almost as much effort as it’s worth. Gold is an
anti-cheating device, because when someone cries “bullshit” you’ve either got it
or you haven’t.
In particular, banks and government cannot print it. And
who hates gold? The monetary elite and governments prefer their dishonest money.
They enjoy the first use of the new money, spending it before it pushes up
prices. Governments can print to cover their debts if necessary. For centuries
the greatest game in banking has been to buy assets in a sector, approve more
lending for purchases in that sector, then sell their assets when the prices
subsequently rise, then cut off lending into the sector and watch the prices
fall - rinse and repeat every few decades.
Banks and governments bash gold. For the last 15 years
most large financials have been predicting gold prices a year hence as 10% less
than whatever it was at the time - but considering that gold has been rising at
21% p.a. for the last ten years, a track record that bad is hard to acquire by
accident.
As any currency trader knows, the long term value of
currencies is determined mainly by their relative rates of manufacture (or
debasement). Since 1982 the amount of above-ground gold has been increasing at
just over 1% p.a., while the amount of the main paper currencies has average
growth around 12% p.a. In 2007 the Australian broad money supply grew at 23%
(yet CPI was less than 3%).
Some say gold is in a bubble. Not so. A bubble suggests
that some ratio or pricing metric has moved up away from its normal value, and
later reverts to its mean. But gold always debases much more slowly than any
paper currency, so basically gold goes up forever against paper currencies, at
an average rate equal to the difference in their rates of debasement. A gold
price of one million dollars per ounce is only a matter of time - but will it
take 50 years or 500 years?
By historical standards, the price of gold is now low. In
the gold rushes of the 1850s, it was worth leaving the city to sail on a wooden
boat for three months, then live in the wilderness scratching in the dirt for a
few ounces of gold per year. What gold price would it take to get you to do that
today? Modern gold mining is a highly mechanized business yet it is barely
profitable.
The total amount of debt in the world in 2011 was around
210 trillion USD, and the world’s GDP was 60 trillion. Yet the value of all the
gold ever mined, going back to the Egyptians, is just 9 trillion USD. If gold
ever re-enters the official financial system, it will have to move up in value
quite considerably.
The last gold price rise was 1968 – 1980, when it rose
from 35 to 800 USD per ounce. What stopped its rise then? Overnight interest
rates around 20%, which made paper currencies attractive and stopped their
debasement. Presumably it will take similar interest rates to again stop the
rising gold price. But nobody today can afford to pay 20% interest rates,
especially governments, so gold is going to keep trending up for quite a
while.
Forecast to 2028
We can calculate how long the upcoming inflation will last
and how high gold will go, based on a few reasonable assumptions. The usual
caveats about forecasting apply, and if the central banks lose control of the
situation we are likely to veer off either into hyperinflation (more likely) or
depression (less likely). But let’s be optimistic and assume they successfully
chart the most politically feasible course.
Debt levels are currently around 375% of GDP, but need to
revert to their normal level of 150%. This requires a 60% reduction in the real
value of debt.
Let’s suppose we get inflation cranked up by 2014, that we
run a 1970s high but tolerable inflation of around 12% (which the modern CPI is
likely to register as only around 5 – 8%), and that interest rates are around
6%. Then the real interest rate is -6% - so it takes 14 years to reduce the
value of debt by 60%.
To end the inflation, governments must make a credible
commitment to halting the rapid growth in the stock of money: they must raise
interest rates sharply, to maybe 15 – 20%. The gold price will continue trending
up until that happens, so until then gold investors can relax (ok, the ride
might be volatile). But when real interest rates go strongly positive, it’s time
to get out of gold :-)
Gold has been rising at a remarkably steady 21% p.a. for
the last ten years. About 11% of that might be due to the current debasement
differential, while the rest might be a combination of catch up for the period
1980 – 2001 when the gold price fell substantially in real terms, fear over the
possible abandonment of paper currency, and the possibility that gold will
re-enter the official money system. Under the scenario outlined above, the rate
should remain roughly similar.
Assuming gold continues to rise at an average of 21%
p.a.:
http://www.321gold.com/editorials/evans/evans081612/1.gif (http://gold-silver.us/forum/evans081612/2.gif)
Don’t let the nominal prices bedazzle you. Due to the
inflation, a dollar of 2028 is only worth 17 cents in today’s money, so the peak
price of $50,000/oz is only around $8,400/oz in today’s money.
(Click on image to
enlarge)
http://www.321gold.com/editorials/evans/evans081612/2.gif (http://gold-silver.us/forum/evans081612/2.gif)
The amazingly straight rise of gold for the
last 10+ years. Graph from Nick Laird at sharelynx.com.
Dr David Evans
Posted Aug 16, 2012
The high rate of debasement of paper currencies ensures the gold price trend will be solidly up until interest rates rise sharply, to maybe 15% in 2028.
Gold is monetary. It is the main non-government currency, evolved in the marketplace over 5,000 years.
the rest at http://www.321gold.com/editorials/evans/evans081612.html
Key excerpt:
Gold
Gold enforces honesty, because you have to earn it before
you can spend it. No one can conjure it up for little effort, and even digging
it out of the ground often takes almost as much effort as it’s worth. Gold is an
anti-cheating device, because when someone cries “bullshit” you’ve either got it
or you haven’t.
In particular, banks and government cannot print it. And
who hates gold? The monetary elite and governments prefer their dishonest money.
They enjoy the first use of the new money, spending it before it pushes up
prices. Governments can print to cover their debts if necessary. For centuries
the greatest game in banking has been to buy assets in a sector, approve more
lending for purchases in that sector, then sell their assets when the prices
subsequently rise, then cut off lending into the sector and watch the prices
fall - rinse and repeat every few decades.
Banks and governments bash gold. For the last 15 years
most large financials have been predicting gold prices a year hence as 10% less
than whatever it was at the time - but considering that gold has been rising at
21% p.a. for the last ten years, a track record that bad is hard to acquire by
accident.
As any currency trader knows, the long term value of
currencies is determined mainly by their relative rates of manufacture (or
debasement). Since 1982 the amount of above-ground gold has been increasing at
just over 1% p.a., while the amount of the main paper currencies has average
growth around 12% p.a. In 2007 the Australian broad money supply grew at 23%
(yet CPI was less than 3%).
Some say gold is in a bubble. Not so. A bubble suggests
that some ratio or pricing metric has moved up away from its normal value, and
later reverts to its mean. But gold always debases much more slowly than any
paper currency, so basically gold goes up forever against paper currencies, at
an average rate equal to the difference in their rates of debasement. A gold
price of one million dollars per ounce is only a matter of time - but will it
take 50 years or 500 years?
By historical standards, the price of gold is now low. In
the gold rushes of the 1850s, it was worth leaving the city to sail on a wooden
boat for three months, then live in the wilderness scratching in the dirt for a
few ounces of gold per year. What gold price would it take to get you to do that
today? Modern gold mining is a highly mechanized business yet it is barely
profitable.
The total amount of debt in the world in 2011 was around
210 trillion USD, and the world’s GDP was 60 trillion. Yet the value of all the
gold ever mined, going back to the Egyptians, is just 9 trillion USD. If gold
ever re-enters the official financial system, it will have to move up in value
quite considerably.
The last gold price rise was 1968 – 1980, when it rose
from 35 to 800 USD per ounce. What stopped its rise then? Overnight interest
rates around 20%, which made paper currencies attractive and stopped their
debasement. Presumably it will take similar interest rates to again stop the
rising gold price. But nobody today can afford to pay 20% interest rates,
especially governments, so gold is going to keep trending up for quite a
while.
Forecast to 2028
We can calculate how long the upcoming inflation will last
and how high gold will go, based on a few reasonable assumptions. The usual
caveats about forecasting apply, and if the central banks lose control of the
situation we are likely to veer off either into hyperinflation (more likely) or
depression (less likely). But let’s be optimistic and assume they successfully
chart the most politically feasible course.
Debt levels are currently around 375% of GDP, but need to
revert to their normal level of 150%. This requires a 60% reduction in the real
value of debt.
Let’s suppose we get inflation cranked up by 2014, that we
run a 1970s high but tolerable inflation of around 12% (which the modern CPI is
likely to register as only around 5 – 8%), and that interest rates are around
6%. Then the real interest rate is -6% - so it takes 14 years to reduce the
value of debt by 60%.
To end the inflation, governments must make a credible
commitment to halting the rapid growth in the stock of money: they must raise
interest rates sharply, to maybe 15 – 20%. The gold price will continue trending
up until that happens, so until then gold investors can relax (ok, the ride
might be volatile). But when real interest rates go strongly positive, it’s time
to get out of gold :-)
Gold has been rising at a remarkably steady 21% p.a. for
the last ten years. About 11% of that might be due to the current debasement
differential, while the rest might be a combination of catch up for the period
1980 – 2001 when the gold price fell substantially in real terms, fear over the
possible abandonment of paper currency, and the possibility that gold will
re-enter the official money system. Under the scenario outlined above, the rate
should remain roughly similar.
Assuming gold continues to rise at an average of 21%
p.a.:
http://www.321gold.com/editorials/evans/evans081612/1.gif (http://gold-silver.us/forum/evans081612/2.gif)
Don’t let the nominal prices bedazzle you. Due to the
inflation, a dollar of 2028 is only worth 17 cents in today’s money, so the peak
price of $50,000/oz is only around $8,400/oz in today’s money.
(Click on image to
enlarge)
http://www.321gold.com/editorials/evans/evans081612/2.gif (http://gold-silver.us/forum/evans081612/2.gif)
The amazingly straight rise of gold for the
last 10+ years. Graph from Nick Laird at sharelynx.com.