$4,000 Gold! Yes, But When?

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$100 Silver! Yes, But When?

(October 2012)

There are hundreds of predictions for the price of gold. Some say it will crash to nearly $1,000, and others proclaim $3,000 by the end of 2012. The problem is that some predictions are only wishful thinking, others are obvious disinformation designed to scare investors away from gold, and many are not grounded in hard data and clear analysis. Other analysis is excellent, but both the process and analysis are difficult to understand. Is there an objective and rational method to project a future gold price that will make sense to most people?

Yes, there is!

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I am not predicting a future price of gold or the date that gold will trade at $4,000, but I am making a projection based on rational analysis that indicates a likely time period for gold to trade at $4,000 per ounce. Yes, $4,000 gold is completely plausible if you assume the following:

  • The US government will continue to spend in excess of $1 Trillion per year more than it collects in revenue, as it has done for the previous four years, and as the government budget projects for many more years.
  • Our financial world continues on its current path of deficit spending, debt monetization, Quantitative Easing (QE), weaker currencies, war and welfare, ballooning debts, and business as usual.
  • A massive and devastating financial and economic melt-down does NOT occur in the next four to six years. If such a melt-down occurs, the price of gold could skyrocket during hyperinflation or stagnate under a deflationary depression scenario.

Still with me? I think most people will accept these simple and rather obvious assumptions.

Many individuals find it difficult to believe any projections for gold, either higher or lower, because gold is hated, loved, often ignored, and seldom understood or recognized as the ultimate currency. However, most people know that the US government national debt is huge and will grow much larger during the next decade. Examine the following graph:

Click on image to enlarge.

National debt is plotted on the left axis – yes, it was larger than $16 Trillion as of September 30, 2012. Gold is plotted on the right axis. The data covers an 11 year span from September 2001 through September 2012. This period includes the time after the stock market crash of 2000, the game-changing events of 9-11, the real estate crash, and the new bull market in commodities. Each month represents one data point. Note the similarity between the two trends. The statistical measure R-Squared for this 11 year period of monthly data is 0.969 – very high.

This expansion in the national debt is a simple proxy for expansion of the money supply and the devaluation of the dollar. The exponential growth rate for the national debt averaged over this period is 9.7% compounded annually, while the rate averaged over the last five years is 12.3%. The exponential growth rate for gold is a bit larger – about 18% per year compounded annually. I attribute this larger rate, in excess of 12.3%, to the realization that gold is a competing currency, mining supply is growing little, most governments are aggressively “printing money,” investors are increasingly interested in gold, and central banks are buying, not selling gold. In short, the realization that gold is real money and cannot be “printed” at will (like dollars and euros) has reached the awareness of the wealthy, central banks, sovereign governments, and a few individual investors. I believe it is very likely that national debt and the price of gold will continue their 11 year exponential growth trend.

Since gold correlates closely with national debt, we now have a clear, objective, and believable proxy (national debt) to model the future price of gold. Extend national debt and gold prices forward for the next five years based on the exponential increase from the last five years, and the result is the following table. Bracket gold prices, high and low, based on past annual volatility at about 15%.

As you can see, this projection for gold prices indicates that gold could reach $4,000 as early as September 2016, with a theoretical projected price of $4,000 in late 2016 or early 2017.

The next graph shows the price of gold, on a logarithmic scale, with high and low trend lines. The horizontal line at $4,000 shows the earliest and latest dates at which the trend lines project gold will reach $4,000. Those dates are November 2015 through June 2017, which are consistent with the above projection based on the tight correlation to the national debt.

Click on image to enlarge.

Conclusion

We may be skeptical of price projections for gold, but projections for national debt are quite believable. Since the correlation is very close, future gold prices can be projected, assuming continuing deficit spending, QE, and other macroeconomic influences. Another crash or an unexpected bout of congressional fiscal responsibility could accelerate or delay the date gold trades at $4,000, but the projection is reasonable and sensible. Gold increased from $270 (July 2001) to over $1,200 (December 2009). An increase of that size seemed utterly improbable in 2001, yet it happened. An increase from about $1,700 (October 2012) to $4,000 (perhaps early 2017) seems much easier to believe, especially after Bernanke’s recent announcement of QE4-Ever. Read We Have Been Warned.

GE Christenson
aka Deviant Investor

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11 Responses to “$4,000 Gold! Yes, But When?”

  1. Al says:

    Very interesting article, I read many. I myself have precious metals in my portfolio. I truly beleive in fellows like M. Sprott and Turk they are honorable men and walk the talk. Also for learning Mike Maloney is a great teacher. It is hard to see they rate go down but you have to be patient. When it does go down because there dumping paper gold it only helps the physical buyers who are looking for dips to keep stacking so demand remains although through a different avenue. If it ever goes south well justsit on it , its physical you cant lose it . Like your house if the value goes down dont sell it stay there, unless you owe more than the value. Im just saying if your house is paid. I do not have any paper gold, only physical holdings and physical trust. Anyhow just my thoughts.

    • Thanks for your thoughts and comments. I agree completely. Sprott, Turk, and Maloney are always worth listening to, and physical gold is real and valuable. Paper gold is always a maybe. Trust the physical.

      GE Christenson
      aka Deviant Investor

  2. john says:

    You say “Gold increased from $270 (July 2001) to over $1,200 (December 2009). An increase of that size seemed utterly improbable in 2001, yet it happened. An increase from about $1,700 (October 2012) to $4,000 (perhaps early 2017) seems much easier to believe”

    Isn’t the fact that easy to see things never come true and the impossible seems to happen regardless an argument against it ? If it’s easy to believe, it probably won’t happen.

    • I don’t agree with you entirely. I do agree but just a little. Your premise that easy to see things never come true – is not, in my opinion, true.

      I can give so many examples but rather than get into that line of discussion, let’s go a different direction.

      Gold could rally from under $300 to over $1200 because it was out of favor with investors and had been beaten down in price for years. Hence it was very undervalued and able to rally.

      A contrary example: The Dow is in near record territory and on everyone’s mind. It is not out of favor and not beaten down in price. I doubt it has much upside left. I doubt that we can expect much if any rally from here.

      The difference is whether or not an investment is fully valued or not. I suspect that the Dow is fully valued or overvalued now, while I think gold is very undervalued now. It has been beaten down for 1.5 years and is constantly denigrated in the media. Hence I think it is capable of a large rally.

      GE Christenson
      aka Deviant Investor

  3. Ronnie says:

    I am a investor, however the side pop up annoys no end.

  4. [...] strongly correlated with the ever-increasing official national debt of the United States. Read $4,000 Gold! Yes, But When? Does anyone believe that the national debt will decrease or even remain constant over the next [...]

  5. major says:

    As long as Obama and his charlatan socialists remain in charge, I expect the madness to continue for the foreseeable future. One thing that was not taken into account was the likelihood of social chaos or outright rebllion against the so-called new world order.

    • I agree that the next 4 years will be exceedingly difficult – economically and politically. Most people will be unprepared for the coming trauma.

      I did not address social chaos as I have little to say about it – other than it seems likely in some urban areas. Are you prepared?

      GE Christenson
      aka Deviant Investor

  6. David Gunter says:

    Hi

    I liked this very much as it does show the best correlation of any data set I have seen – but I do not understand where $2 Tr projected budget deficits come from. Can you explain this scenario and rate the probability somehow?

    Thanks

    • I actually only said $1 Trillion budget deficits in the article. But, the exponential growth rate suggests $2 Trillion deficits are not far away. Remember, I think of a deficit as the net increase in the national debt from year to year. Congressional budgets have “off budget” items and other accounting games that make the deficits appear smaller than they are.

      Congress can choose to pretend that “off budget” items don’t count for political purposes, but the money is still spent and the debts continue to rise. The national debt rises faster then the “official budget” due to these “off-budget” items and other such misrepresentations.

      On a related point: We hear about mandated budget cuts as part of the “fiscal cliff,” but what Congress means is lowered rate of INCREASE in the budget – there will probably be no real reductions as far as we can see. Based on history, the expenses will continue to rise and always more rapidly than projected.

      GE Christenson
      aka Deviant Investor

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