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By Jim Rickards
After two years of trading in a 20% range between $1,600 and $2,000 per ounce, gold finally broke out to the upside, closing at a new all-time high of $2,126 per ounce on March 4.
Better yet, if you’re a gold investor, gold has held its ground around $2,100 per ounce since breaking that ceiling (gold’s trading at around $2,187 today).
The price is volatile, but gold broke even higher on March 5 when it hit $2,140 on an intra-day basis. Before getting too euphoric, gold investors should recall that the $800 per ounce record set in January 1980 during borderline hyperinflation would be $3,200 per ounce in today’s dollars if adjusted for inflation.
That can be a splash of cold water in the face. On the other hand, it’s highly encouraging. If gold is in a new bull market, $3,200 per ounce looks more like a price target than an insurmountable hurdle.
But I continually remind gold investors, whether in bullion or mining shares, not to get too euphoric when gold rallies and not to get too depressed when the dollar price retreats. Gold is still the best form of money and proves valuable to investors over time.
What’s Behind the Gold Rally? Will It Last?
The bigger questions are: What are the factors driving gold higher, and will they continue the trend?
Some of the factors are clear. Central banks have been net buyers of gold since 2010 after being net sellers from 1970–2009. Mining output has been flat for the past eight years; it’s not shrinking but it’s not expanding either.
That combination of strong demand from central banks and flat output from mining is a recipe for higher prices and a de facto floor. Some analysts point to potentially lower interest rates as a driver of higher gold prices since fixed-income instruments compete with gold (which has no yield) for investor dollars.
It seems likely that the most powerful driver is the one getting the least attention.
Outright Theft!
At the start of the war in Ukraine, the U.S. froze about $300 billion of U.S. Treasury securities lawfully purchased by the Russian Federation.
Legally, those securities are still owned by Russia, but they cannot be sold, traded, transferred or used as collateral. (By the way, this is easy to do because all Treasury securities are held in digital form by custodians on a ledger ultimately controlled by the U.S. Treasury.)
Now the U.S. is trying to seize those securities. This is outright theft. Such theft is contrary to numerous provisions of domestic and international law, but the U.S. is pushing the main custodian of those securities, Euroclear in Belgium, and European banks to amend their laws or ignore them for this purpose.
Other countries are watching. China, South Korea, Japan, Saudi Arabia, Taiwan and other nations have hundreds of billions of dollars each in U.S. Treasuries in their reserve positions.
Watching what the U.S. is doing to Russia is causing those countries to consider alternatives to Treasuries. That’s easier said than done. If U.S. Treasuries are in danger of being stolen, it’s not clear euro- or yen-denominated securities are any safer.
Gold is the liquid, safe alternative and appeals to many investors in a world where Treasuries can be confiscated at will.
$15,000 Gold?
I’ve frequently forecast that gold will reach $15,000 per ounce by 2026 or sooner. That was never a guess or something I said to get attention; it was the result of rigorous analysis based on prior bull markets in gold.
There’s never a guarantee that a particular outcome will prevail, but this gold price forecast is based on the best available tools and models that have proved accurate in many other contexts.
This is a good time to explain exactly how that $15,000 price forecast emerged.
For a technical model, we turn to the two prior bull markets in gold and compare those to the performance of the current bull market.
The first bull market in gold ran from August 1971 to January 1980. The dollar price of gold rallied from $35 per ounce to $800 per ounce. That’s a 2,200% gain in 8.4 years.
The Second Bull Market
The second bull market in gold ran from August 1999 to August 2011. The dollar price of gold rallied from $250 per ounce to $1,900 per ounce. That’s a 670% gain in 12 years.
Of course, the period after 1980 was a long bear market that lasted 19 years and saw the dollar price of gold drop 68%. The period from August 2011 to December 2015 was another bear market lasting 4.3 years that saw the dollar price of gold drop 45%.
I’m not ignoring those. It’s simply the case that we’re in a new gold bull market now, so prior bull market behavior is the right reference frame for predictive analytics.
Another question is why do I begin my bull/bear market analysis in 1971? Gold has been money throughout the history of civilization and has been minted in the form of gold coins since at least the sixth century B.C.
The answer is that prior to 1971 either gold was money (in which case there is no other “money” to compare it to; gold was valued by weight, not exchange rates), or the world was on a gold standard in which the money price of gold was fixed (albeit with suspensions of convertibility during wars and periodic breaks due to devaluations).
In a world in which gold is money or gold’s value is fixed by law, there are no bull or bear markets, although there can be inflation or deflation.
The Third Bull Market
The third bull market in gold began on Dec. 16, 2015, with gold hitting a bottom of $1,050 per ounce at the end of the prior bear market. Since then, gold has rallied to about $2,187 per ounce as of today.
If we take a simple average of the price gains and durations of the two prior bull markets in gold, we arrive at a 1,435% gain over a period of 10.2 years.
Applying that gain and duration to a baseline of $1,050 per ounce beginning in December 2015 leads to a gains projection for this bull market of $15,070 per ounce by August 2026.
There’s nothing deterministic about this model. Actual gains could run ahead of this projection both in time and by amount. Conversely, the bull market could end anytime for a wide variety of reasons.
The prior bull market gains could be annualized to produce a slightly lower average gain per year. Still, the bull market assumptions are moderate since I’ve taken a simple average and not stretched for the higher gain or the shorter duration of the two.
Again, using the history of gold bull markets as a guide, a dollar price of gold of $15,000 per ounce in under three years is really not that big a stretch.
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