"Everything you need to know about gold"
PREDICTIONS FOR $20K GOLD
Gold at $20,000 is the latest price prediction from a high profile analyst. The article I read makes a strong case for how the gold price could go to $20,000 oz. if the US dollar loses ninety percent of its current value.
That part of the explanation is correct. And it is what I have been saying in my articles over and over again; namely, a higher gold price reflects the loss in purchasing power of the US dollar that has already occurred – nothing more, nothing else.
GOLD AT $2000
Gold flirted briefly with the $2000 number last month. At $2043 oz., it was several dollars shy from matching its peak price eighteen months earlier at $2058 oz.
With the current gold price at $1958 oz., the $2000 number is the sweet midpoint of that range. It is a nice round number and seems to be the price most gold traders and investors are focusing on at this time.
It is probably a good idea, therefore, to see if the $2k gold price holds any special significance other than what most in the gold community are thinking about.
And it does.
BULL (THE FED)
Today, more than ever before, focus is on the Federal Reserve. The general public has joined economists, financial analysts, and market participants in monitoring and parsing every statement regarding Fed action and policy.
Each morsel of data receives the the strictest attention. The actions are mostly for naught, of course. That is because most of those asking the questions are unaware of certain facts that would change the nature and tone of Fed focus overnight.
In retrospect, nothing much has changed since I published my original article $100 Silver Has Come And Gone in October 2019.
The price is higher than it was at the time the article was written, and that is certainly positive. However, the net change since then does not alter the fundamental arguments stated in the original article. Let’s review the salient points now.
Gold’s next big surprise could be on the downside. Continued strength in the US dollar throughout the current Russian – Ukrainian conflict is the indicator.
NO PROFIT POTENTIAL IN GOLD
Seems like the gold bulls are getting worked up again for another charge at some lofty fantasy peak. It is a wasted effort.
The closer gold’s price is to it’s most recent inflation-adjusted price peak, then the less potential for short-term profits. See the chart below…
INVESTING IN GOLD LONG TERM
Before the recent gold price rally, gold advisors and investors had begun the deferral process associated with their short-term expectations for the price of gold.
Most of them are still positive and optimistic in their projections but have become more fluid about when to expect higher prices. Generally speaking, the higher price expectations tend to be on the north side of $2000 oz.; sometimes much farther north.
GOLD PRICE RATIOS
There are two charts below for your observation. We will review each of them in sequence and then provide some commentary and conclusions.
GOLDMAN STILL LOOKING FOR $2K GOLD
Last week Goldman Sachs revealed its latest projection for the gold price…
“In a report published Thursday, the bank (i.e. Goldman Sachs)said that it is raising its 12-month price forecast to $2,150 an ounce, up from its previous target of $2,000. The bank also recommends buying December 2022 gold futures.” … Kitco News 01/26/2022
SILVER’S PRICE PERFORMANCE
Maybe silver’s price performance is not so bad. There is a case to be made that silver has met its expectations; at least relative to gold, that is.
Those who are insistent that silver has huge ground to make up in comparison to the gold price should take special note.
GOLD-SILVER RATIO
Whenever comparisons are made between gold and silver prices, some investors and analysts base expectations for higher silver prices on the fact that a return to the fixed gold to silver ratio of 16:1 is inevitable.
The argument is based on the belief that there is a fundamental justification for the ratio and that the two metals will gravitate back towards it.
In the Mint Act of 1792, the gold price was fixed at $20.67 oz. and the silver price at $1.29 oz. The official fixed prices for both metals were in effect when the creation of Federal Reserve was authorized by an act of Congress in 1913.
When gold peaked in August 2020 at $2060 oz., it marked an all-time high and nearly exact one-hundred fold increase ($2060 divided by $20.67) in price over the past century. This correlates with the ninety-nine percent loss in US dollar purchasing power over the same time period.
The price of silver in August 2020 peaked at $29.26 oz. which was not an all-time high. Also, the multiple increase in silver’s price is less than twenty-three ($29.26 divided by $1.29 = 22.68) fold compared to gold’s one-hundred fold increase.
This means that silver’s price is not keeping up with the effects of inflation. It is not even close to doing so.
In order for silver to match the one-hundred fold price increase in gold at $2060 oz., the price of silver would need to be $129 oz. ($129 divided by $1.29 = 100).
NEW GOLD-SILVER RATIO?
In March 1931 the price of silver was $.29 oz., having fallen along with other commodities over the decade of the 1920s. Silver’s price had declined seventy-five percent from its high of $1.13 oz. in June 1919.
The official price of silver was still $1.29 oz., so the amount of silver in a silver dollar was worth nearly eighty percent less than the official government price.
If we use $.29 oz. (a fully deflated price and only one penny off its all-time low of $.28 oz.) to measure silver’s price performance going forward, we find that in August 2020 at $29.26 oz. silver’s increase is now close to one-hundred fold and matches the one-hundred fold increase in gold.
Calculating a ratio for the two metals yields a considerably different result than the official 16:1 number. When we divide the gold price of $20.67 oz. by $.29 oz. for silver, the result is a ratio of 71:1, rather than 16:1.
That compares favorably with the ratio of 70:1 resulting from the calculation using the August 2020 highs for both metals ($2060 oz. divided by $29.26 oz.).
CONCLUSION
When comparing silver’s price performance to gold’s, measuring from Depression-era lows for silver is more realistic than using the $1.29 oz. fixed price.
Investors and others should reconsider any pronouncements claiming that silver is undervalued relative to gold.
If, however, you think that there is merit in calculating and relying on any gold-to-silver ratio, please keep in mind the following:
(also see Gold-Silver Ratio: Debunking The Myth and Gold And Silver – Fundamentals Be Damned)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!