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Gordon Pape
Gordon Pape

GOLD AT $10,000?

August 13, 2011 | About:

Quick now - what world-changing financial event happened exactly 40 years ago, on Aug. 15, 1971? Anyone?

The answer: President Richard Nixon took the U.S. off the gold standard, effectively freeing the precious metal to trade at whatever price the market would bear.

The President's decision, made as the U.S. Treasury was seeing its gold reserves rapidly vanish as foreign governments cashed in their greenbacks, ended the international monetary framework known as the Bretton Woods Agreement that had been in place since 1944. The price of the metal had been set at $35 an ounce (quotes in U.S. dollars) by that deal and every nation was allowed to convert dollars to gold at that price (individuals were not, however). The arrangement worked for more than 25 years but with the stroke of a pen Nixon blew it all away.

"The Nixon Shock was a central cause of the Great Inflation," Roger Lowenstein wrote recently on Businessweek.com. "It was also the end of the fixed relationships that had governed the financial universe. Previously, people took out mortgages for set periods and at fixed rates. They had virtually no options for saving money other than in banks, and the interest rates that banks could pay were capped. Floating currencies unleashed a new world of risk and instability…The world gravitated from the certainties of Bretton Woods to the dizzying market cycles we've lived with since."

Of course, at the time no one thought of all these complex ramifications. The headline story was that the price of gold had been freed. Perhaps even more important, Nixon repealed an Executive Order made by President Franklin D. Roosevelt in 1933 that prohibited Americans from "hoarding" gold coins, bullion, and certificates within the continental United States. The penalty for violating the law was a $10,000 fine or up to 10 years in prison!

By cutting the gold/dollar tie and allowing individual Americans to buy the metal, Nixon unleashed a trading frenzy. Over most of the next decade, gold rose steadily in price until it finally topped out in early 1980 at about $850 an ounce - a gain of more than 2,300% since the President's historic 1971 announcement. At that point, people were lining up around the block at the downtown Toronto branch of the Bank of Nova Scotia to buy the metal, obviously assuming the price would keep climbing.

It didn't. Bullion sold off and by the mid-1990s it was back in the $400 range, less than half of the 1980 peak. By January 2000 it was down to $300 an ounce and it bounced along in the $200 to $300 range until early 2002. At that point, it began a slow upward climb but it didn't really take off until 2007 when it moved from $600 to $900 in a year, a 50% spike. After a rather puzzling pull-back to the $800 range during the financial crisis of 2008-09, gold took off again and, except for some minor corrections along the way, has never looked back. It ended last week at $1,742.60 after flirting with $1,800 earlier.

So where does gold go from here? Are we at another peak, similar to what we saw in early 1980? Or will bullion continue to soar? A lot depends on how the global fiscal and economic situation unfolds in the coming months.

The latest spurt in the gold price was fuelled by a combination of the sovereign debt crisis in Europe along with America's debt ceiling stand-off and the subsequent downgrade of the U.S. credit rating by Standard & Poor's. Once the initial panicky reaction to those events subsided, the gold price retreated.

But the hard truth is that the underlying problems remain. There is simply too much debt out there and crises are going to continue to re-emerge until governments take the tough actions necessary to put their financial houses in order. It's interesting to see that Canada is being cited as a role model for countries looking for ways to restore fiscal stability because of the way the Liberal government of Jean Chretien and Paul Martin dealt with our debt crisis in the 1990s. During the 2008-09 financial meltdown, it was our banks that were touted as examples for everyone else, now it's our astute fiscal management. Who knew we were so smart?

I have never been an ardent gold bug and for many years I was skeptical of fanciful claims about how high gold would climb. For most of those years, I was right but this is a changed environment. It's not just that investors are more conscious of gold; even more important is the fact they have lost confidence in governments and central banks to manage not only the global economy but their own finances.

Demand is further fuelled by the fact there are more buyers in the marketplace. Many central banks are building their gold reserves - they own about half the world's supply at present. Bullion funds and ETFs such as the SPDR Gold Shares (NYSE: GLD) are hoarding billions of dollars worth of the metal - GLD alone has gold assets worth almost US$74 billion! Then we have China and India, where wealthy individuals are reportedly losing confidence in paper currency and accumulating large amounts of gold as protection.

So how high could the gold price go? I put the question to Nick Barisheff, who runs Bullion Management Services and has been studying precious metals for many years. His startling reply: $10,000 an ounce within five years. Barisheff believes that the inevitable outcome to current trends will be hyperinflation. In that scenario, gold will be one of the only true stores of value. "There is no good solution to this," he says. "It's not going to end comfortably; it's going to end badly."

Although he says the timeline is hard to predict accurately, if the situation continues to deteriorate he sees bullion at $5,000 an ounce within three years, and doubling in the two years after that.

Unfortunately, if he is right the global economy will be a basket case at that time. We will be in the grip of a crippling stagflation or, worse, a depression. The jobless rate will soar, hundreds of thousands of people will be destitute, governments, with rapidly falling tax revenue, will slash services, and social unrest will be rampant. It's not the kind of world anyone wants to see.

Having always been what I call an optimistic realist, I want to believe that world leaders will find ways to avert this grim scenario. I've lived through many apocalyptic predictions and not one has yet come to pass. Hopefully, this one won't either.

That said, I've taken a little insurance by buying some units in Barisheff's BMG BullionFund. It is unique in that in invests only in gold, silver, and platinum bars, in equal amounts. The fund has been in existence since 2002 and has about $320 million in assets under management. The metal it owns is stored in repositories of the Bank of Nova Scotia in Toronto, New York, and Hong Kong. The one-year gain to July 31 was 44% compared to an average of 36% for the Precious Metals Equity category. Perhaps more significantly, as of Aug. 10 it had gained almost 17% in 2011 while every precious metals equity fund was in the red.

I like the fund because of its diversified commodity holdings (Barisheff's pure gold fund has not done as well this year) however the MER is high at slightly more than 3%. If you find that too pricey, take a look at GLD or at the Claymore Gold Bullion ETF (TSX: CGL) which is hedged back into Canadian dollars. It has an MER of only 0.54% and was showing a year-to-date gain of 15.1% based on NAV as of July 31.

We are adding both CGL and BullionFund to the IWB Recommended List for members who prefer funds that invest in the commodities rather than in mining stocks. Of course, if you want to buy gold you can actually touch, head over to the Bank of Nova Scotia and they'll be happy to accommodate you. Their ScotiaMocatta division is one of the world leaders in bullion marketing. For more information go to www.scotiamocatta.com.

About the author:

Gordon Pape
Gordon Pape is the best-selling author/co-author of many acclaimed investment books, including the recently-published Sleep-Easy Investing (Viking Canada ). He is also publisher and editor of five investment newsletters, including the Internet Wealth Builder, Mutual Funds Update, The Income Investor, and The Canada Report, which was created specifically for U.S. residents interested in investing in Canada . He is a columnist for several magazines and websites and a frequently quoted media source. He has been a featured speaker at numerous events including the World Money Show in Orlando . His websites can be found at www.BuildingWealth.ca and www.TheCanadaReport.com.

Rating: 2.0/5 (26 votes)


Tonyg34 - 9 years ago    Report SPAM
gold $10,000 reminds me of 1999 when there were articles about Dow 20,000. Would you really rather have a single ounce of inert metal instead of a car? or one year at university? a year's rent (in the midwest, not NYC of course) ?
The Science of Hitting
The Science of Hitting - 9 years ago    Report SPAM
Valuation for equities - attempt to find a range for intrinsic value based on company specific data, via financial statements and industry knowledge about growth, competitive advantage, sustainability of business, etc.

Valuation for gold - make a statement about macro picture ("inevitable outcome of current trends will be hyperinflation"), then pick an arbitrary number without any explanation as to why/how ("$10,000 an ounce within five years")

That's my biggest issue with gold; if it was at 1/2 of today's price or 2x today's price, the argument is exactly the same - just another arbitrary price target...
Nport - 9 years ago    Report SPAM
I've been investing for 50 years. Seen a lot of cycles come and go. In my opinion, Gold will break your heart. Invest in great companies for the long run.
Cogito - 9 years ago    Report SPAM
I think that Nixon made a good choice in dropping the gold standard - I don't understand why we would want to limit our money supply by the amount of available gold when our economy is growing exponentially. Wouldn't this cause deflation?

I agree with "The Science of Hitting" that the gold price is arbitrary. After all: what is the fair value of gold? Gold is beautiful, you can make wedding rings from it, you can put it in a safe. But I don't see how to determine a fair value for gold. As long as you cannot assess its intrinsic value, how can you assess whether its price is too low or too high? Actually, as gold doesn't have any important use, I believe that its intrinsic value should be low.

In absence of value, the price of gold is driven by supply and demand, only. Hence, every price is thinkable. You buy gold because there may be historical evidence that the gold price rises when confidence in governments recedes. But that's just psychology - you cannot extrapolate history into the future. What it comes down to is that you buy gold because you believe that other market participants will be willing to pay more for it in the future. That's the greater fool principle, isn't it?

The trend may continue because more and more speculants enter a market when prices rise. But when the trend breaks, the price may fall fast. Without being able to assess gold's value, you will not be able to know when this time comes. That's speculating, not investing.

Superguru - 9 years ago    Report SPAM
"what is the fair value of gold?"

I am not sure if USD has a fair value either. It appears to be on the whims of Fed and their printing capabilities.

"In absence of value, the price of gold is driven by supply and demand, only. Hence, every price is thinkable"

replace by gold by USD above and it will hold true. Though Gold can go up and down both, USD apparently can only devalue.

Being a reserve currency gives USD somewhat of a special status though.

Please correct me if my thinking is faulty.

( I am taking USD as an example because I am American but same thinking applies to other currencies as well.)
Mo77 - 9 years ago    Report SPAM
According to the following Bloomberg article back in 2009.

Gold hit a then-record $873 an ounce in 1980.

Using the U.S. Labor Departments inflation calculator, that equates to $2391 in today's dollar.

Based on that the current price of $1744, puts the metal at 28% off it's all-time inflation-adjusted high.

That being said I would be wary of any asset that everyone is buying.

John Templeton once said : "The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell."

Gold seems to me to operates in the exact opposite way.

As far as currencies go, there is little doubt any dollar in any currency in the future will have less purchasing power than it does now.

The problem with gold is that it strikes me as a something that you cant measure the value.

It is an raw material that has zero utility as opposed to copper, oil or coal.

It's price and perceived value is derived from this historical perception that strikes me as bizarre.

Why isn't silver deemed more valuable? Is it because silver is gray and gold is shiny yellow?

Shares in high quality businesses bought at reasonable valuations should retain their value far better than something like gold, which seems to me to be the ultimate speculation.

The full link to the article:


Ranjitsudan - 9 years ago    Report SPAM
Only rationale of buying gold is that it is hedge against super inflation and paper currency. Since almost all the major currency have lost value in last decade or two- gold has risen in value and will continue to rise in value until central banks stop printing money and diluting their currency.

Other reason for gold to continue to rise because of demand from central banks. US dollar is no more sound proof reserve so they are looking to gold as alternative. China is looking to float yuan and would buy gold to back their currency. Given it has limited supply, Gold will continue to rise.

Nobody knows what is $$$ value for per ounce of gold but this has always been a case historically. One way to get idea of valuation is to check its historical value against US dollar/money in circulation. SO you can take gold price in 1970-80 and compare it against money in circulation during that decade. Then compare this against current gold price (adjusted for inflation) against money in circulation. I am sure you will find gold is undervalued.
Tonyg34 - 9 years ago    Report SPAM
A long-standing rule of thumb among gold enthusiasts is that an ounce of gold should equal the cost of one high-quality man's suit. (this goes back to ancient Rome, when an ounce of gold allegedly was enough to purchase a top-of-the-line toga.)

A silly debate? Maybe. But this is the central issue any investor faces when dealing with gold. Gold generates no income. It is, in a sense, a perpetual zero coupon bond. So valuing it isn't easy. It does, however, act as a store of value over significant periods of time. And for that it shouldn't be dismissed out of hand. However, I would prefer to buy when the asset class is out of favor, which is certainly not the case today.
Ranjitsudan - 9 years ago    Report SPAM
Well, not many fund manager, common people hold gold as an investment! so certainly not in favor.

Case for gold is simple, its a currency which can't be diluted easily because you can't print out of thin air like US dollar. If Federal Reserve keeps printing money, gold will keep going higher.

Anyhow: if you think gold is in bubble, check gold price against swiss franc or australian dollar, it flat. Its only rising in EURO and of course in USD!

Anon - 8 years ago    Report SPAM
A lot of really ignorant comments there. "zero utility"??!!!! ever loked at the contacts on your mobile phone batty? sim card? SD / memory card? PC cards? cpu connectors? Every piece of modern technology needs gold. NO GOLD = NO COMPUTERS. Still think its a useless metal?

One day you'll wake up and realise those poeces of paper with numbers printed them are just pieces of paper with numbers printed on them. I don't think there is a fiat currency in the world that has survived much longer than a century. People look back over the last 50 years and think thats how the world has always been. The 20th century was a huge anomaly in human history: Exponential population growth, exponential environmental degradation, central bank inflation. The federal reserve system is less than 100 years old and has resulted in currency losing around 97% of its value.

Further when the fractional reserve started currency was backed by 20% hard currency i.e. Gold. Not only has that dropped to 5%, its also turned into 'Tier 1 capital', which includes bank stocks as part of the value (actually thats the main part). So in the event of a bank ceasing operation you would only get 5c for every one of your dollars they are holding. If their share price plummeted (which it would in a crisis) you would be lucky to get 1c.

Which asset is really worthless?

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