How the gold price could go north of $5,000

May 13, 2010

It sounds like a gold bug’s dream. But looking back to the last inflation-adjusted peak price in 1980, it’s far from impossible that the gold price could soon go above $5,000 an ounce.
The potential level of a new peak can be estimated in several ways. Based on consumer price inflation, the $875 per ounce high seen in 1980 is equivalent to around $2,400 today, almost twice the current gold price. But there’s a case for taking account of economic expansion as well as price inflation.
The world’s economic output has increased about six-fold since 1980. Scale up the peak 30 years ago by that multiple, and the gold price could top out at around $5,300.
Gold can also be regarded as an alternative to money. Broad global money supply, known as M3, is now in dollar terms about 10 times what it was in 1980. The total gold supply has also increased to some 170,000 tonnes from 110,000 tonnes over the same period as more of the metal has been mined. Scaling up by money supply and deflating by the gold supply, the 1980 peak price would be equivalent to about $5,700 an ounce today.
Looking at money supply another way, today’s potential gold price would be a bit lower than that. A narrower measure of global money, M1, is currently estimated at about $17 trillion. If the 170,000 tonnes of gold mined through history were to substitute for this, the gold would be worth around $3,100 per ounce. But that wouldn’t account for the tendency of the thinly-traded gold market to overshoot sometimes to the upside, as for instance in 1980, and sometimes to the downside.
Of course, there is a considerable chance that gold and other commodity prices will peak at a lower level. But if a four-fold increase over a couple of years from today’s gold price to more than $5,000 an ounce seems impossibly extreme, that was the trajectory in 1978-1980. If governments continue to print money, whether for economic stimulus or to stave off defaults by themselves or others, fear of widespread currency debasement and the consequent inflation could create the conditions for just such a spike.

Comments

Someone should email a link to this article to a user called American Patriot over on the Marketwatch discussion boards…

Posted by reconstructions | Report as abusive
 

A pro-gold article in the mainstream media? THe media has been ridiculing gold all the way from 250 to 1250.

Eventually people will realize precious metals are the only thing that can protect their wealth from central banks that can destroy the value of their money with the stroke of a key.

It’s not too late to buy, wait for a pull back and get some.

Posted by Nomorekoolaid | Report as abusive
 

The people that own gold are minority compared to those that don’t. If there is inflation and everyone that doesn’t own any gold gets burned then who do you expect to buy the gold. We’ll never go back to the gold standard because our economies are not meant be stable the inflation is what burns the savings and forces the people to invest or get their savings depleted by inflation over time. If every one put their money in gold than our economies will collapse. At he end there is no practical use of the gold except the value that the people assign to it. In many countries where the economies collapsed due to natural catastrophes or civil war the gold never went into play they rather went to most primitive trade of goods( 10 goats for a cow) from individual to businesses until the government came up with printed money after erasing few zeros.

Posted by Macedonian | Report as abusive
 

please make sure the capital changes hands and our economies work because if everything stops don’t be suprised if you pay an ounce of gold for a dozen eggs

Posted by Macedonian | Report as abusive
 

Nonsense. The value of gold is explicitly the cost of getting it out of the ground and getting it to the market, which in net terms has only gone DOWN over the years. The points above are good points, but fail to take that simple fact into account. Ever greater supply that also is sticking around and not being consumed also bites into demand…world GDP may have increased, by world population, who might WEAR that gold, and certainly form the core of demand, has not gone up x5. If gold ONLY had use as a currency hedge, and was used for no other purpose, this might be a valid analysis. However, gold’s value is derived from the things it is used for, not as ‘representative of the money supply’.

==Bob D.

Posted by REDruin | Report as abusive
 

Macedonian,

The myth that savings are bad has been dispelled in this article.

http://mises.org/daily/4193

Bob — I would suggest you read about the history of gold. You appear to lack a historical appreciation for its role as a currency. Gold has always become the currency when paper fiat currencies failed. Every paper fiat currency has failed in the history of the world, eventually. Given current events, it is not hard to predict the current era of fiat currencies will again fail.

Posted by redrob25 | Report as abusive
 

nomorekoolaid: The media also ridiculed gold all the way from 850 to 250, and with cause too. Anybody foolish enough to by Au in 1980 waited until around 2006 or so to break even. Break even! Frankly, the more I read about gold bugs calling for outlandish highs and the more I read about people buying gold as a ‘hedge’, the more I think this market has topped.

Posted by Gotthardbahn | Report as abusive
 

reconstructions:

Americanpatriot in MArketwatch is none other than Jon Nadler, the guy who’s been telling people not to buy gold since it was 600 because it would crash.

He’s been calling for a crash in gold since then and he still talking

Posted by Nomorekoolaid | Report as abusive
 

The same arguments against gold get ricycled everytime it makes a new high, but the bull market in precious metals keeps marching on.

Posted by Nomorekoolaid | Report as abusive
 

Rob McEwen founder of Goldcorp and now U.S Gold Corporation said gold will reach 2000 by year end. It is good to take these predictions with a grain of salt. It is quite easy to say gold will be $2,500 or $5,000, but no one is really saying when… The value of gold relates to market fear and the fact that it is a physical, not paper currency. If the economy goes south, expect gold to hold it’s value or rise gradually as it always has. $2,000 per ounce is still cheap when adjusted for inflation, so it is very possible to see it over a few years.

We posted this article at my blog MastermindGrowth Blog.

Posted by MastermindGrow | Report as abusive
 

Macedonian,

You can exchange an ounce of gold for a dozen eggs. I’m going to pay with a pre-1965 silver dime.

Your theory that inflation is required to spur investment misses the primary reason for investment. Investors seek profits! It is called Capitalism. You can have profits with zero inflation. Capitalism created the greatest country in the world, America!

Lastly, I view gold more like insurance rather than investment. All fiat currencies can fail (and may), yet I will still have some asset for my labors. All that will be left are physical assets such as precious metals.

Posted by Centcom | Report as abusive
 

Saying the price of gold (in U.S. Dollars) will peak (and go back down), doesn’t understand what is about to happen!

Have you ever heard of hyper-inflation? Americans have had that happen once before to their money called the Continental. Commerce degenerated to barter since no one wanted a Continental. Gold was of infinite value to the Continental. The Continental has made a come back in value simply for its scarcity and souvenir value.

Canned food will become a currency because of the large number of people for the amount of farm land. The price of food has been held artificially low by shorting it as “futures.” This was done for decades by the city people wanting cheap food. The concept of shorting is about to die with the Dollar. Living in the big cities is about to become unviable.

Posted by Timuchin | Report as abusive
 

I am ever astounded at the ignorance and distorted logic of those great numbers of “educated” people who regard gold as irrelevant to the modern world of money ….
I take this article very seriously …It is not so much a question of Gold appreciation , but rather currency debasement …I bought a new automobile 50 years ago for the cash equivalent of 30 oz.gold …That same 30 oz.AU will buy an even better new auto today .The price in dollars has increased circa 30 fold ..All global currencies are FIAT…convertible to nothing except more paper ….The “interest ” on cash or bonds is below inflation rates – even before tax…..and is thusly NEGATIVE !….Everyone must choose either “feel good ” fantasy – or intrinsic reality .

Posted by bocacassidy | Report as abusive
 

So why can’t American citizens find out from the federal reserve where $2 trillion in emergency loans have been given to since the ’08 crash? …. and now with Europe being in the worst financial shape since WWII or perhaps even WWI….the US dollar’s value is a mirage, likewise the EURO, I think we are approaching a rare time in modern history where Gold does have the potential to reach a much higher price, perhaps even above $5k/troy oz. Paper money is already worthless, it’s just that the masses don’t know it yet. I’ll sell my gold when I hear taxi drivers recommending to buy gold but not until then.

Posted by tljanssen | Report as abusive
 

Gold prices reach to a new height every month. The value of gold is explicitly the cost of getting it out of the ground and getting it to the market, which in net terms has only gone UP over the years.

gold prices

Posted by alex757ronald | Report as abusive
 

Gold`s very basic value come from the mind set of human that it is the rare, most stable, shiny , precious metal since thousands years ago. Gold price can go down if,
(1) over supply from mining happen.
(2) us, british, swiss bank and all the bank in the world sell their gold to the market.
(3) when human mind set changed to that gold is just kind of metal.
ALL that three situation are unlikely happen . because gold ore getting less in the world. Bank need to reserve gold as valuable asset, if not , whats more valuable during economy crisis. The human mind thirst for gold never changed and human populations increased everyday. Gold has been undervalue since 2009 , when gold is not used as world currency anymore, just because that gold supply and reserved does not enough to meet the high demand during the economy crisis in 2008 . Gold Reserve never enough to meet the high demand in this world call earth . if all bank in this world dare to sell tons of gold to the market and gold price can go down to usd 1200 an ounce , it will trigger the entire human in this world to buy more and more gold ….. it will end up gold price going up and up . if bank keep less reserved of gold and let the people in the world own all the gold ………. isnt sounds good ? it never happen , bank is wise. people love gold , so bank need to keep more. never keep less . when human populations increased , gold reserved by bank should increase . gold price should logically grow with growth of human population, because gold`s value come from human mind set to own more gold as a stable , shiny, precious , decorative asset.

Posted by tigerchai | Report as abusive
 

The price of gold has nothing to do with getting it out of the ground. Gold is less rare than silver. Bull markets, Hyperinflation, and the devaluation of the dollar drives gold prices up and sometimes down. The price of gold has very little to do with how many people are buying gold earings. Its obvious some people have no clue about markets or generacl economics. BTW gold has risin in the past because of inflation. We have yet to see hyper inflation, but its comming.

Posted by jonnyfishon | Report as abusive
 

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