How High Does Gold Go?
A few readers have written in to ask “When are you going to sell your gold?” I have a coin that I bought back in 2001 when gold was under $270 an ounce and I’ve just never had the gumption to part with it; always held to the idea that it was one of the few things that the government of Zimbabwe (or the US) could not just tack a bunch of zeroes on an call it a ‘gain’ and then tax me on it.
The simple answer, of course, is to look at a chart of how gold fared in 1980 when it hit a peak of over $850 an ounce briefly in January. Now, running over to the Minneapolis Fed inflation calculator (on their home page here) and plug 850 and 1980 in, we arrive at the price level $2,199.27, although because gold traded instantaneously over $850, some pundits bandy about the $2,300 level. Maybe, but not everyone (or anyone) I know is a perfect top picker, so I find myself thinking “$2,200 is close enough for government work…”)
Now let me explain when I will be buying real estate again by wheeling out a cocktail napkin where I will show you what has been going on with the price of gold for the past couple of years both on absolute terms and in terms of relative value - this latter being the defining metric for all investments yet it’s one few bother to think about.
We will start with a simple chart of where housing prices have been - and where they seem to be headed, shown in the left axis of the chart, and the price of gold very approximately, shown in the right (vert) axis of the chart:
What this chart illustrates is that in (July 2007) a house that was worth $300,000 when the house flipping mania and outburst of zero-doc loans was at its peak required a little more than 450-ounces of gold to purchase. Now run forward to today where that same house may have dropped to $175,000 on a cash basis and then let’s project these trends out to the end of next year when at their extremes one can see the situation arise where 50-ounces of gold might buy a house.
But is this extreme? Heck no! On an historical basis an ounce of gold would buy either a decent house (probably something in the $150K range in terms of today’s pricing) or it would buy 5-acres of land and some livestock to run on it.
While I can’t speak to the price of land up in your area, the going rate for wild/undeveloped land adjacent to ours is about $2,500 on a cash basis presently. So what would this imply for the ultimate price of gold? Well, I can make the case that gold should be priced at $12,500 in today’s dollars and something well over that when we get a little ways further down the pike in government spending beyond our incomes.
One more thing to ponder is “What happens to the price of silver in all this?” Well, to my way of thinking, silver is the real leverage play (not that gold is bad, mind you, LOL). When I told you I was buying a little silver in July 2005 around the $7/an ounce level with the thought that I might sell it when it would pay off my (then) new tractor I have to confess I’ve never sold it and the tractor is about paid off. We were in no hurry to pay it off because it was a zero percent loan - which made really good sense to me at the time (and still does…).
You can find a lot of discussion of the gold to silver ratio on the net and a here’s a good article on topic from 2008. Looking at the very long term trend (a chart on point is about halfway down this page) we can see that until about 1979, the ratio of gold/silver was between 10 and 15 to one.
However since then (and it may have been delayed follow-up to Nixon closing the gold window which I think was around 1974) the average has been about 70 to one with a spike in 1980 of 100 to one.
Fast forward to this morning and in the pre-market, gold has almost touched $1,050 while silver’s high has only been $17.54 which is a ratio of a bit over 59.
If we were to speculate (which is what we have to call this because calling it ‘investing’ is just as misleading as calling flash trading’ investing), I would expect minimally to see just on an inflation adjusted basis a blow-off top of gold to $2,200, a doubling of oil prices, housing drop another 30-50% from present levels and a silver ratio of somewhere between 60 which would imply $36 silver t0 100 which would still imply $22 silver.
Then I’d sit back and take a look around and see what’s happening. Sometimes long-range ’single decisions’ should be rethought - about every 10-years or so, which means I will be due to rethink my ’single decision made in 2001′ in a couple of years from now.
Could the gold/silver ratio return to historical levels of say 15 to one? You bet. And what would than make silver? Oh, $146 an ounce and change. It’d be nice, but I’m not trying to get rich - just trying to hold on to my purchasing power while the (so-called) Fed is printing up dollars. I figure by that time, the amount of purchasing power left in the US dollar which is presently about 4.6¢ compared to the whole dollars in 1913 when the banker coup got rolling, ought to be down to under 4¢ on the dollar, which would imply an inflation rate of 13% or higher.
While that seems outlandish, over at Trader Bart’s M-3 Reconstructed chart, you can see that while ‘money’ (hard to call it that, sorry) creation has backed off a tad in recent months, the annual rate of growth of ‘money’ in its highly fictionalized paper form is still running about 16½ percent annualized, so the idea that consumer price inflation will catch up to money supply bloating isn’t so much a ‘maybe’ as a ‘when’.
And that sets up what my friend Jas Jain looks to as the defining figure which is due out this afternoon from the Fed - that’d be the Consumer Debt figure, which the central banksters call the “consumer Credit” figure because they are creditors and they would just as soon you don’t think of all this as a debt game because if you did that you’d be brought back to the reality that debt is a yoke of oppression that keeps a man (or woman) from being truly free. The more debt, the more kontrol - but you knew all that.
If gold drops to $700-$800, I figure the ratio to real estate won’t move much, but housing prices will be collapsing more (next year, early) which is why a good stock strategy has always been playing to countercyclical high beta stocks - same kind of thing, except the high beta units happen to be denominated as ‘houses’ and ‘gold’.
Radio Appearances
Cliff (www.halfpasthuman.com) and I will both be on the Jeff Rense show on internet radio tonight. See www.rense.com for details on how to hook in to the audio stream. Cliff will no doubt be reviewing the economic update (and more) since he ran the model of the model late last week and I will be on in the second half of the show to talk about (what else?) the Consumer Debt figures.
Maybe a few words about the Treasury Budget, but Clive Cussler fiction is more to my taste, thanks. (His newest are Spartan Gold (Fargo Adventures)
Treasury Bids Go Limp
One of our banker friends (he’s a good guy in a community bank - not one of the gougers) sent along the results of yesterday’s 70-day Treasury Auction. Not good:
“For release at 10:00 a.m. EDT (Oct. 6)
On October 5, 2009, the Federal Reserve conducted an auction of $50 billion in 70-day credit through its Term Auction Facility. Following are the results of the auction: Stop-out rate: 0.250 percent
Total propositions submitted: $24.830 billion
Total propositions accepted: $24.830 billion
Bid/cover ratio: 0.50
Number of bidders: 75 The awarded loans will settle on October 8, 2009, and will mature on December 17, 2009. The stop-out rate shown above will apply to all awarded loans.
Translation: OK, so you’re not a fixed income guru: Bottom line is the government was trying to raise $50-billion from the bond sale and didn’t make even half that. Can you say “No interest”? Well, not no interest. Just not enough at a rate of ¼%.
When you read things like the Australians raising rates, you know what that means, right? The money boys are looking for fatter returns which drives a stake through the heart of those…um…green shoots.
—
Besides having banks prepaying insurance premiums, an amazing three-years worth, do I detect an increase in FDIC enforcement actions? Revenue, revenue, revenue, eh?
Oh Look - Inflation!
Oil is back over $71 a barrel on economic recovery hopes. Most people haven’t taken the time to pencil out where inflation would be if oil prices hadn’t collapsed from the $150 range down to the present ultra-cheap levels. I’d do that for you, but you’d end up doing a lot of drugs to cope and we don’t want any responsibility for your chemical solutions to life’s absurdities.
Hyping War, Tracing Precedents
Of course, all this means that the government has to find new and creative ways to print money and then pump it into the economy. What better way than expanded war-making? Ooops! Right on cue here: “US troop build-up in Afghanistan may be gaining favor“. Stories like “Obama to discuss Afghanistan with Advisors” are simply formalities of a Bush-era surge to come. Care to bet on it?
Unfortunately, despite the promises of ‘change’ the Obama administration has fallen back on the old Bush-era ‘permanent war for permanent peace’ thinking which has justified the continued evolution of the Post Orwellian Security State. Word that “Police chiefs endorse anti-terror community watch” is, oh, youi know…just part of how it all fits. Besides, there aren’t too many economic levers left to pull that allow for tweaking of the economy. Fine tuning can be done with military levels and spending.
The really coarse adjustments need to be done with big (e.g. terrorist) events, etc. (If you thought for just a second that ‘etc.’ included things like instant flu threats‘ you get a gold star! If you are looking for the ‘mutated flu’ to be set loose at the winter Olympics in Vancouver, you get a whole row of gold stars for the day… or a single blue one if you simply read the predictive linguistics report and remember the details of that part on page 30 or 40-something)
“Swine flu’s bigger impact on blacks and hispanics is not being addressed” notes the NY Daily News today. You noticed, too? I don’t suppose I need to speculate as to “Why” do I? Got’cher
copy of “Limits to Growth” handy?
—
If the UN keeps talking about replacing the US dollar as the global reserve currency, I’m sure that a flurry of Osama bin Laden tapes and communiqués will follow.
No one in ‘officialdumb’ is likely to call the UN out on their currency views for two reasons. First is that the G-20 already says that’s what’s planned and 2) because the UN is doing a fine job hyping ‘cyber-threats’ which helps to lay the foundation for licensure of the internet. Just like the Communications Act of 1934 was the ‘free speech land grab’ of the 1930’s depression, licensure of the internet will be the ‘land grab’ of this depression. Give it time - a couple of years max, although Spring 2010 seems likely based on the movement of the sheep who seem to be on the verge of wakening. Can’t have that…
Have I revealed too much? Doggone it…let’s get back into minutia for a minute, shall we?
Grain Options
I am halfway expecting some wheat options (March 2010 calls) to start gaining back some of their lost value. Why? “Rice output to slump in Philippines on Storm Damage.“ People have this habit of eating…my kind of demand curve - nice & steady.
Dig This
The Jerusalem Post this morning headlines that ‘Israel digging under Temple Mount’. Now, you talk about a piece of real estate that has held its value, how would the Dome of the Rock compare with that Empire State Building-sized object debated for Midtown NY?
(Illegal) Immigration Reform
The Obama administration is considering “US to overhaul immigration system” but just what that means isn’t clear yet. “Detainees will be ranked by risk factors, and new detention centers will be built.” So, that contingency study that KB&R was working on ($500-million for the study, wasn’t it? My memory is bad at this hour, but it wasn’t free…that much I recall) may be used for something after all?
I may seem pretty stupid on this stuff, but you know, if we’d just FINISH THE DAMN FENCE and BEEF UP BORDER PATROL we could SOLVE THE PROBLEM AT ITS SOURCE, but that wouldn’t be one of those aforementioned fine adjustments to the economics levers, then, would it?
Nope. Instead we need to design and build multiple Club Feds.
Czar Wars
New Windy City
Big winds in Cleveland. Hmmm…don’t see any political gatherings there…
Quick, get Boone Pickens on the line and ask him “Why Texas, why not the shores of the Great Lakes, huh?” Ask him about eminent domain and right of ways, too, would yah?