On the Money Trail
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Is Gold at $3,000 an Ounce Just a Matter of Time?

by Al Jacobs, author of Nobody's Fool: A Skeptic's Guide to Prosperity

May 2011

Rarely do I fail to read articles on gold, silver or other precious metals that come to my attention.  As it does for many other persons, the subject fascinates me.  To this day I grimly fanaticize over the Sixteenth Century expeditions of Hernando Cortez and his looting of Montezuma’s Aztec treasures.  Vivid in my memory is the tale of the Comstock Lode, the 1859 discovery of silver ore in what is now Virginia City, Nevada, and the emotions it released. The abortive 1869 manipulation of the gold market by James Fiske and Jay Gould, resulting in the September 24th panic known as Black Friday, still raises a chuckle for me.  And on the subject of chuckles, there’s nothing to compare with the fiasco of the Hunt Brothers, Nelson and William, during their attempted corner of the silver market in January 1980.  Without a doubt, precious metals exert an insidious affect on the human psyche.  They can bring out the best—and the worst—in all of us.

But, so much for the psychological impact that gold and its companion metals impose on society.  Let’s get down to this article’s titled question: Is gold at $3,000 an ounce just a matter of time?  Before addressing this, we must flash back in time to get an historical perspective of gold’s performance.  Without a past reference, it’s tough to predict the future.  An appropriate date to start our viewing is 1833 - exactly one century before the world found itself in the depths of perhaps the severest and most prolonged depression in mankind’s history.  And during that one-hundred-year-period the world price of gold remained nearly unchanged at between $19 and $25 per ounce.  Not until the early 1930’s, when the price of the metal became regulated by government fiat, did its value began to fluctuate.   By 1934 the value of gold settled in at $35 per ounce, largely the result of the U. S. government, under newly-elected President Franklin D. Roosevelt, setting that as an established price together with a prohibition of gold ownership by its citizens.  And there, at $35 per ounce, the price remained until 1970 when President Richard Nixon rescinded the policy, deregulating the metal, and once again permitting ownership by U. S. citizens.  During the roughly forty years since its deregulation, the price of gold reacted to various market forces, often unpredictable.  By 1980 its price exceeded $600 per ounce; by 1990 it could be purchased for $375; ten year later, in 2000, it dropped to $275; by 2005 it recovered to $450; in 2010—a scant five years later—it hit $1,250; at this writing, April 29, 2011, it boasts a value of $1,565.70, with daily increases of $25 not uncommon.  For whatever reason, gold appears to be going straight up.

Enough of history—on to the future!  Does anyone predict this continued phenomenal rise in the price of gold?  One knowledgeable person certainly does.  Frank Holmes, CEO at U.S. Global Investors, envisions gold rising to $2,000 per ounce.  He argues that virtually all commodities except gold have gone through their “inflation-adjusted 1980 price levels,” which translates to a value in excess of $2,000, and that “the long-term trend will be strongly upward.”

Looking well beyond the $2,000 per ounce value, we find another enthusiast, Lindsey Williams, a pastor who claims inside disclosures from the elite inform him of commodity trends.  He predicts gold at $3,000 per ounce before the end of 2012.  Although this inside information may be questioned, Rev. Williams’ accurate prior forecasts on the price of crude oil speak well for him. 

A concurring prediction of gold at $3,000 comes from David Rosenburg, a former chief North American economist at Merrill Lynch, and now chief economist and market strategist at Guskin Sheff & Associates, Inc., Toronto, Canada.  As long ago as June 2010, with gold at $1250 per ounce, he reported on a Bloomberg video interview that he considered a $3,000 value to be “conservative.”  No doubt his attitude would be even more enthusiastic today.

This article is now at the point where I must address its title: Is Gold at $3,000 an Ounce Just a Matter of Time?  Simply reviewing history and presenting the opinions of select investment experts won’t suffice.  I will now offer my prediction and explain my reasons.  However, to begin with, I offer an apology of sorts.  To suggest that something will attain a particular price within “a matter of time” is unfairly vague.  Given enough time, almost anything can come to pass.  One of my obscure readings revealed that in 6th Century England, a workman was prohibited by law from earning more than 100 milrays per day, a milray being one-hundredth of a penny.  To suggest then that in “just a matter of time” a workman might earn ten dollars a day (100,000 milrays) would prove to be correct . . . but meaningless.  Thus, it’s possible that gold will sell at $500,000 per ounce “in a matter of time,” but that may be forty generations hence.  For this reason I’ll revise my title to read: Is Gold at $3,000 an Ounce on the Near Horizon?  Now this is a question I can get my teeth into.

I believe there to be three principal factors which will determine gold prices over the foreseeable future, and for our purposes I consider foreseeable as extending only through this decade.  What may happen in the years beyond 2020 becomes increasingly less related to anything we can anticipate or control.  These three factors are  (1) inflation in the economy  (2) governmental intervention  (3) intrinsic use of gold.  Let’s look at each of these.

(1) Inflation in the Economy.  A conventional belief exists, perhaps accurately, that rapid inflation in an economy will cause gold prices to rise.  In characterizing inflation, we’ll accept the definition of The American Heritage Dictionary of the English Language, Fourth Edition, 2000, which states:

A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.

If we look no further than the uncontrolled spending and increasing national debt which our nation’s leaders promote, we cannot help but conclude that a high rate of inflation will follow.  If our presumption is correct that this will spur a rise in gold prices, then chalk up one vote in that direction.

(2) Governmental Intervention.  Whether or not uncontrolled inflation will result from our nation’s spending policies, there can be no doubt that our economy is nowhere near recovered from the miseries of these past four years.  My belief is that it is a depression, not a recession, from which we must emerge, and with high unemployment continuing as a major drag on the economy, our citizens’ suffering will continue.  Regardless of your political experience or economic expertise, there is really no way you can predict what action a government may take as an economy continues to unravel.  As our elected public officials generally specialize in getting elected to public office, rather than in effectively resolving problems after being elected, we may only guess as to what precious metals regulations they may enact.  I’m afraid this second factor cannot guide us in predicting the direction that gold prices will take.

(3) Intrinsic Use of Gold.  We are now at what I believe to be the crux in determining future gold prices.  Central to my reasoning is a fundamental reality: Except for its use in ornamentation, the metal possesses no commercially viable application.  It can be admiringly gazed at, sensually fondled, and tastelessly drooled upon, but that is where its use ends.  Simply stated, the value of gold is what a buyer can be induced to pay for it.  By contrast, as an investor I became the unwitting owner of a house in an adjacent county that experienced a drop in value.  Though I’m not pleased with my acquisition, particularly with valuable cash tied up in it, it’s currently rented to an affable tenant and generating what amounts to a rather dismal 3% annual return.  I contend that the value of any investment relates to the income flow it produces.  But an investor in gold who likewise sees its value plummet can resort to no such money-generating application while waiting to see if the market corrects itself.  It is this lack of income generation that does not portend well for gold.  Cast one ballot in the downward direction.

I’ll now summarize my expectations as to where I see gold heading over the next eight to ten years.  Fundamental to my prognosis is the recognition that the current rapid escalation in price per ounce is contrary to its historical trend.  I acknowledge, of course, that vast fortunes may be made through involvement in precious metals, and at times it can seem almost magical.  However, when it comes to our personal investment program, we must put fantasy aside.  The gold frenzy is quite recent; it’s my experience that what rises rapidly normally declines in the same way.

I’ll now insert another factor into the mix.  In my opinion, the escalation in gold prices over the past several years can be attributed to a combination of two realities: First, that most investors have been deprived of any viable investments.  Money market funds and CDs pay next to nothing; bonds appear hazardous if interest rates rise as many predict; real estate is in the dumps with no sign of recovery; and dividend yields are at an historic low.  So, with no truly enticing investments to attract the public, gold can be offered as an acceptable alternative.

The second half of the reality is evident to anyone paying attention.  For the past few years precious metals, and particularly gold, continue to be touted from every conceivable forum.  Talk show hosts pitch it; television ads praise it; financial advisors of every stripe are hired to recommend it; full-hour informercials extol it.  You cannot spend fifteen minutes in any media environment without being told that gold is the investment of the century and that its value will rise forever.  As expected, there are legions of poor innocents who,  burned by securities or real estate, are eager to travel the one sure road to everlasting wealth.  Thus gold is effectively peddled, and as long as the sales continue, its price will rise.  At some point this market will return to earth. 

I’ll conclude with a final thought.  Whether or not gold makes it to $3,000 per ounce is not nearly as meaningful as the question: Is gold a wise investment?  My response must be in the negative.  Despite recommendations to the contrary, there is no sound justification for investment in precious metals, whether as the base metal, the specie, or stock in related companies.  The markets for gold, silver, and the like long ago entered the pseudo-religious realm, with adherents extolling their virtues, much as with Scientology or transcendental meditation.  These markets are, by their nature, subject to manipulation, so that performance cannot rationally be predicted.