Every bull market for each type of financial instrument has three phases:
- accumulation of an undervalued asset by so-called “smart money” that recognizes the undervaluation,
- growing public participation as the uptrend gains increasing attention, and
- inevitable speculation that leads to overvaluation of an asset and eventual resumption of a new downtrend.
Gold is now in the early stages of phase 2.
The gold price has been in a rising uptrend from its low of $1050 in December 2015. This climb has occurred within a multi-year base during which gold has been accumulated because it was and still is undervalued. With gold’s breakout this year above $1300, its 2-year base should now be viewed as a launching pad that will take gold much higher in the months and years ahead as phase 2 inevitably morphs into phase 3. How much higher depends on what central banks do.
Right now central banks want more inflation, and they are getting it. In 2017 crude oil – the price of which is a reliable forecast of rising inflation – rose by 12.5%. This year it has already risen 6.4%.
Central banks are actively pursuing their more-inflation goal with a variety of policies that weaken the purchasing power of the national currency each bank is managing. So to protect their wealth from the ravages of inflation and other policies that debase the currency people need to hold and use in everyday commerce, they protect their purchasing power by buying gold and silver, which as history has demonstrated time and again is the logical response.
If central banks continue their policies that debase national currencies, then expect a much higher gold price. But again, how much higher depends on how badly every central bank eats away at the purchasing power of each national currency.
It also depends on one other basic element. What is gold’s fair value?
I use mathematical models based on historical results to calculate gold’s value. These models are explained in my latest book, “The Money Bubble: What To Do Before It Pops”. Using these models we can calculate that gold’s fair value presently is about $11,000 per ounce.
An 8-fold increase in the gold price to reach that level may sound shocking. However, it is quite modest when compared to gold’s 24-fold increase from $35 to $850 in gold’s 1968-1980 bull market. That historic price rise is also greater than the 10-fold increase if we were to use $1050 as the base of our calculation for that $11,000 calculation of gold’s fair value.
In Congressional testimony in 1912, JP Morgan, the leading financier of the day, said: “Money is gold, and nothing else.” From his insight we can conclude that the dollar is a money-substitute that circulates in place of money, which is gold. The ‘Money Bubble’ pops when gold reaches phase 3.
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This article was first published on King World News on February 5, 2018.
My objective is to share with you my views on gold, which in recent decades has become one of the world’s most misunderstood asset classes. This low level of knowledge about gold creates a wonderful opportunity and competitive edge to everyone who truly understands gold and money.
