Gold was valuable 3,000 years ago and will be valuable 3,000 years from now. But can you say the same for dollars, euros, yen, or pounds?
Gold maintains its value (on average) over centuries. Can you expect similar longevity for debt based fiat currencies that are managed by politicians and created with printing presses or computers in central banks?
If “printing money” truly created wealth individuals and countries would be much wealthier since most central banks have been “printing” rapidly. The Fed has “printed” about $4 Trillion since the 2008 crisis to bailout banks and “stimulate” the economy. In today’s prices that would be about 3 billion ounces of gold, or approximately 30 years of global gold production. Central banks want to manage economies by using paper and digits instead of real physical gold.
Gold Facts and Gold Cycles:
Gold prices over the past 40 years have been manipulated up and down of course, but we can mostly agree that historical prices are facts. Note the graph below of gold prices – log scale over 40 years – and note the green vertical lines every 98 months – about every 8 years. Major lows have occurred about every 8 years.
Note a similar graph below showing gold highs. Vertical red lines are spaced 95 months apart – about every 8 years. Major highs have occurred about every 8 years.
Gold price parallels:
Date Price (Appx.)
August 1971 $42
April 1974 $189
August 1976 $101
January 1980 $850
April 2001 $255
August 2011 $1,923
July 2015 $1,072
- From August 1971 (when President Nixon “temporarily” terminated the dollars for gold agreement with the world) to April of 1974, gold increased in price by about a factor of 4.5. It then dropped by about 47% in 2 1/3 years.
- From April 2001 to August 2011 gold increased in price by about a factor of 7.5 and then dropped by about 46%.
- The rally into 1974 took 3 – 5 years while the 2001 – 2011 move took 10 years. The price of gold had been constrained during the 1960’s by the London Gold Pool, and when the controlled price broke free, it moved rapidly to a new and “shocking” high close to $200. The gold price had been less constrained during the 1990s so the move into 2011 took much longer.
- The 1974 – 1976 drop took about 2 years and moved about 47%. The August 2011 – July 2015 drop took twice as long and moved about 46%. Both the moves up and down took longer than in the 1970s.
- After the near 50% retracement in the 1970s, gold rose in a bubble by a factor of about 8.5 in 3.5 years.
- Suppose, since recent price moves have taken twice or three times longer, that gold moves higher for 7 – 10 more years and moves upward by a factor of 5 – 10 from the July low. That puts the price of gold at $5,000 to $10,000 in 2022 to 2025.
- That could never happen! Right? Well, maybe?
Consider (all could increase the price of gold):
- Global debt (official), not counting unfunded liabilities, exceeds $200 Trillion. It will increase but probably will not be paid. More debt means more currency in circulation, currencies are devalued, and gold becomes more expensive.
- US official debt exceeds $18 Trillion and is rapidly increasing. Unfunded liabilities, depending on who is counting, are another $100 – $200 Trillion, or more. Politicians will spend and devalue currencies.
- Excessive debt is deflationary. Central banks can’t tolerate deflation so inflation is their game. They will print and print and print. Don’t expect the “money printers” to go quietly into the night and admit failure…
- War is highly profitable for certain industries and financial groups. Those groups might foment war, and several countries might need a war to divert attention and create inflation, more debt, and stimulus to their economies.
- Currency wars, whereby countries devalue their currencies to “stimulate” exports and trade, are in progress. Nobody wins those wars.
- The Chinese stock market has already crashed.
- The US stock market is crashing.
- Unpayable debt in Greece, Italy, Chicago, Puerto Rico, and 99 others… could be a problem …
- Crude oil prices and many commodities have already crashed. Will the $Billions in junk bonds related to shale oil default?
- Will the US bomb and invade Syria?
- Escalation and more war in Ukraine?
- War with Russia?
- Escalation in South China Sea and war with China?
- Israel and Iran might not “play nice.”
- What about nuclear armed Pakistan?
- And many more …
Yes, economic and financial conditions probably will deteriorate, central banks will print, and gold prices will rise. The next 8 year gold cycle low is due in 2017 – it might be a short and sharp drop leading into several more years of rally toward the 8 year cycle high around 2019. However cycles may become less important as a consequence of overwhelming economic and financial stress. We shall see much higher gold prices, regardless of cycle influences.
A simple two question pass/fail test:
- Would you rather have a 100,000 (dollar, euro, pound) certificate of deposit (paying peanuts) in a bank that is planning a bail-in, denominated in a dodgy fiat currency backed by an arguably insolvent government ….
90 ounces of gold stored somewhere safe?
- Yes or No? Do you believe we can borrow our way out of debt and into prosperity?
Remember, this test is pass/fail so don’t overthink it.
The Deviant Investor