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Where is Gold Going?

June 22, 2013

I have been wincing and losing faith in the past several weeks seeing silver drop down to $20 and gold at $1295 an ounce. But if you can weather the storm, I don’t think its impossible that gold could approach $10,000 an ounce by the year 2028. Gold is not going to go up in real terms. Gold has no productive uses. Gold isn’t going to be more valuable. Its the dollar that’s going to collapse, so it will take more dollars to buy an ounce of gold. And to me its not crazy to think the dollar could collapse in value another 80 percent because we have $3 trillion of currency reserves outstanding, and the government has $14 trillion in debt, more than $20 trillion in unfunded liabilities in Social Security and Medicare, and future deficits that will push that debt up by more than a trillion dollars a year going forward.

If the United States has exhausted its borrowing authority, it will print money to fund these deficits. So the $3 trillion of currency and excess reserves outstanding could easily triple, quadruple, or quintuple. If it does, and Bernanke or his successor prints another $12 trillion of currency or extends that to the banks to make them whole on their bad loans, gold will probably appreciate four- or fivefold, and $10,000 an ounce is not an unrealistic price by the year 2033.

So where is gold going? Its going to become a much better storer of wealth and a better investment than dollar-denominated assets. The government can turn on the printing presses and inflate the amount of dollars in the marketplace overnight. Its almost impossible to inflate the amount of gold in the system quickly. A huge amount of gold is stored in the federal reserves and central banks of the countries of the world relative to the amount of gold that is used in either productive capacities or is mined. It is this huge ratio of existing gold reserves relative to its uses or new mining finds that makes gold an ideal currency.

Of course the average person in the street knows that holding dollar-denominated assets versus gold today is more advantageous because we still both value things in dollars and purchase things in dollars. It is our currency of choice. So when you invest in dollar-denominated assets and earn dollars, you use those dollars to make purchases in the real economy.

If businesses accepted ounces of gold as payment this problem would be eliminated, and I would feel much more comfortable in purchasing more gold and even more silver. But that day will not be upon us soon, at least not here in the East Coast of the United States. I am aware that in Utah and Arizona, gold and silver is now legal tender. I do think that people are hard headed and I don’t envision a day they will vacate the dollar and prevent its use as a currency, instead they will have faith in it until the bitter end. However, I do believe the government will so inflate the dollar that some of us will be glad we had a hard asset like gold.

Is gold a bubble that is now bursting? I wondered about this when I saw the drastic drop in the price of gold in April and then again this past week. But once you start to understand that you need to price dollars in gold ounces rather than gold in dollars, you’ll see its the dollar that’s devaluing, not gold that’s increasing in real value or creating a bubble. Gold is not in a bubble at these price levels. Its price solely reflects the enormous amount of dollar printing that Bernanke has done and the devaluation of the dollar.

The price of gold also tries to incorporate people’s expectations of future inflation, and I don’t think anybody thinks that Bernanke is done printing money. His printing has gone to fund the bad loan losses that banks have in the mortgage market, but the banks still have enormous amounts of bad loans that they have not recognized on their books, and the sovereign debt crisis of European countries and Japan is just starting. So Bernanke is going to have lots of sick banks that need saving in the future, and you can be sure he’ll be turning on the presses to aid his friends.

Listen to me, you are going to wish you had some gold.

To demonstrate the power of holding gold as an investment, lets look at a hypothetical. If you had invested all your assets in gold in 1990, you would have outperformed all other mutual funds, bond funds, and even almost all hedge funds over the period, even those that reported nominal returns in excess of 8 percent per year.

Start thinking about measuring things in ounces of gold, and you will get a much clearer picture of both the economy and your own financial position. It would be a helpful exercise for you to measure your total assets over time in dollars and then do a comparable analysis in ounces of gold. The outcome will be discouraging, but you can change that by starting to save some of your savings into gold assets. You will protect the purchasing power of your assets in the dangerous world of unanticipated inflation.

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