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I know that sounds preposterous to most people. In fact, some of you probably think I'm crazy.
But for a whole host of reasons, $5,000 may well end up being a conservative estimate.
So before you start posting comments that I've gone bonkers, hear me out...
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Yet, it happened.
What's more, since hitting its secular bottom back in 2001, gold has posted a positive return in
every calendar year. So far, the current bull market has been pretty orderly.
During the past 10 years, gold has indeed become the trade of the decade, beating out
commodities, oil, high-grade U.S. corporate bonds, U.S. Treasuries, and yes, U.S. stocks.
A crisp $100 bill invested 10 years ago would today be worth more than $400 in gold, $357 in
commodities (as measured by the S&P GSCI Enhanced Total Return Index), $268 in oil, $190 in
corporate bonds or U.S. Treasuries, and only $90 in U.S. stocks.
That's right: We're talking about a $10 loss in U.S. stocks over 10 years. Ouch.
Meanwhile, gold has embarked upon a secular upward trend that is far from over. If the 1970's
are any indication, gold's going much, much higher from here.
When U.S. President Richard M. Nixon opted to close the gold window in August 1971, the
yellow metal had already risen from its fixed price of $35 an ounce to $42 an ounce. By the time
gold peaked in 1980, it had risen to $850, rewarding early investors with a 2,400% return. My
guess is that any such forecast in 1970 would probably have been met with the same kind of
ridicule I expect that my current projection could attract.
Granted, there's no guarantee that we're about to duplicate the 1970s. (I could certainly do
without the disco, bell bottoms and leisure suits). But a s Mark Twain once noted: "History does
not repeat itself, but it often rhymes."
And that could mean even sweeter returns for gold investors this time around.
Better still, let's take the 2,400% gain that gold experienced during the 1970s and translate it into
present-day terms. From the 2001 low of $255 an ounce, a 2,400% gain would take the yellow
metal all the way up to $6,120 an ounce, making my $5,000 price projection seem a lot more
reasonable.
But these are just superficial price comparisons. If we look at what the fundamentals are telling
us, it's clear that gold at $1,100 is a long way from its eventual peak, meaning it still appears
cheap.
Meanwhile, quantitative easing to shorten the recession has caused America's monetary base to
explode. Starting in October 2008, during a very short span of only four months, the central bank
doubled the U.S. money supply, going way beyond anything ever attempted in the nation's
history.
Worldwide, central banks have rolled out an unprecedented $12 trillion worth of stimulus
programs, with most of the money still to be spent.
The proliferation of gold-focused exchange-traded funds (ETFs) bears this out. The SPDR Gold
Trust (NYSE: GLD), the world's largest physically backed ETF with 1,100 tons of the lustrous
metal, is the sixth-largest holder of gold bullion. Individual investors have never had an easier
avenue for owning gold.
This isn't just merely a U.S. manifestation. According to the World Gold Council, demand
advanced 15% from the second quarter to the third last year.
Asia, with a population that exceeds 2.5 billion inhabitants and a long-standing cultural affinity
for gold, is stoking global demand in a big way. China is overtly encouraging its citizens to buy
gold and silver, while offering them gold-linked checking accounts. China is primed to overtake
India as the world's largest consumer of gold. A quickly developing middle class whose
members are experiencing rapid escalations in disposable income are a major bullish driver for
the price of gold.
Gold Fundamental No. 3: Central Banks are Becoming Net Buyers: India's recent purchase
of 200 tons of International Monetary Fund (IMF) gold was the likely impetus that pushed gold
up over the $1,200 level in December. But more important is the sea change that has seen central
banks morph from net sellers into net buyers of gold. BlackRock Inc. (NYSE: BLK), one of the
world's largest investment managers, said that 2009 was that turning point. If that was the case, it
will have been the first time in 20 years, as central banks have been net sellers of gold since
1988.
Gold Fundamental No. 4: A Currency Crisis is Looming: The "PIGS" - Portugal, Italy,
Greece and Spain (or "PIIGS," if you want to include Ireland) - aren't in very good fiscal shape.
And they aren't alone. Iceland has already gone over the edge. The United States, the United
Kingdom, and countless other economies are struggling. And that reality has ignited a crisis of
confidence about fiat currencies in the minds of many investors. Money is nothing more than
paper and ink, backed by the full faith and credit of the issuer. When investors find that their
faith in the issuer is shaken, the value of that currency erodes. Additional sovereign-debt
downgrades from ratings agencies are but one potential trigger of a currency crisis. Under such
conditions, gold - the ultimate store of value, and the oldest existing form of money on earth -
will soar as investors seek to protect their purchasing power.
Gold Fundamental No. 5: We've Yet to Reach the Mania Stage: As we've outlined before, the
gold bubble that takes prices to all-time-record levels will inflate in three distinct stages. This
process will start with currency devaluations in Stage One, will be fueled by growing investment
demand in Stage Two and will experience its stratospheric ascent in Stage Three, the mania
phase of this evolution.
Make no mistake, the $5,000 price point will most likely be reached in this third and final phase.
The price of gold will behave like it is strapped to a jet pack. And today's market prices will be
dwarfed by the levels gold prices will ultimately achieve.
Keep in mind, the entire gold industry has an aggregate market capitalization (value) below that
of Wal-Mart Stores Inc. (NYSE: WMT) alone (currently about $210 billion). So as the crowd
piles in, the "big money" to be made will lie with gold explorers and producers, where 1,000%
returns will not be uncommon, even from today's prices.
All these fundamentals underscore that gold prices have plenty of room to run from here.
And since I expect gold will eventually reach the $5,000 range, that leaves plenty of room for
investors to profit by entering at current levels.
That's why the explorers and producers of the gold sector promise the biggest payoffs. Although
production costs will rise, as gold prices rise, profit margins are sure to expand even faster. Once
cocktail-party conversations turn to gold, for any one of the reasons I've outlined, gold stocks
will erupt and then streak for record highs.
When will this happen? I think it will take a few years. But with bubbles, or speculative frenzies,
one never knows. Just this week, in fact, Robert R. McEwen, the chairman and chief executive
officer of U.S Gold Corp. (AMEX: UXG), predicted that gold could more than quadruple to hit
the $5,000 level by 2012. Some experts have labeled this expected move as a looming
"superspike."
When this happens, gold is likely to create a whole new generation of millionaires, and even a
few new billionaires. Despite the mania stage being several years away, the wise investor
recognizes both the importance and the potential of investing in gold.
I have no doubt that today's $1,100 gold price level will eventually, in hindsight, look like an
outrageous bargain.
My advice: If you own gold and gold shares, hang onto them and buy more on dips. If you don't,
what on earth are you waiting for?
[Editor's Note : Peter Krauth is a contributing editor to Money Morning and is also the
editor of the Global Resource Alert advisory service. A highly regarded market analyst and
expert in metals and mining equities, Krauth specializes in energy- and resource-related
investments.
For more information on profit opportunities in gold and other commodities, check out the
Global Resource Alert.]
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