How High Will Gold Go?

March 4, 2003

I wrote an article recently titled "How Low Will Gold Go?"

It didn’t take long before I was reprimanded for not answering the question in the article. The point I was attempting to make though was that gold was not headed down it was headed up. How high do I think gold has the potential to rise in the coming years? For the record I believe we could see 1,000 dollars an ounce before the end of this decade. Maybe more, maybe not quite 1,000, but the trend is higher & that is the important concept to grasp.

For the past few months the gold market has remained somewhat sluggish. The gold share prices have not had much pep since gold broke the 325 dollar barrier. We have already become accustomed to 350 an ounce gold & the excitement & exhilaration that we first had when gold leaped past 300 has dissipated a bit. And of course all of us are discouraged because the price of gold shares are on average about where they were when gold was struggling to surpass 310 an ounce. Yes, except for a few individual good performers most gold shares have barely budged & are actually off of their 52 week highs established last spring.

One thing I have witnessed personally just in the past few months is the absolute power of those interests seeking a lower physical gold & lower gold share price. Yes, there are interests who do not want to see gold shares going higher. If gold continues to strengthen & to go higher do you think the senior gold companies are going to enjoy paying fantastic premiums for the small junior & exploration companies & their gold deposits?

Remember back in 1996 (gold peaked at 416) when Golden Star rose to a high of over 600 million US dollars and Golden Star at the time was only an exploration company without even established proven & probable reserves? This scenario is what presently is frightening the senior gold producers. I imagine the senior gold companies must be shivering in fear at the prospect of having to pay fantastic sums of money to these smaller junior & exploration companies if the price of gold continues to strengthen & go up. And make no mistake about it! The senior gold companies will have to begin purchasing these smaller gold junior & exploration companies eventually because they are going to need their gold deposits!!! Yes, if the seniors want to stay "seniors" they will eventually have to begin buying these smaller gold companies to obtain their gold reserves

But getting back to my point I have been frustrated in trying to figure out cyclically where we are & where we are heading. Sometimes history gets bogged down & the skies get a little foggy & hard to discern. I have been reading a book recently about the history of Texas & the wealthy men who contributed to Texas History. The book came out in 1990 so from the author’s perspective the history covers for the most part the late 70s through the 1980s. Not very long ago, but a totally different world than today to be sure. A passage that I read really stuck in my mind & drove home a point I had forgotten.

"And Clint Murchison, like his father before him, didn’t believe in keeping a lot of cash lying around: those who were cash heavy, he predicted, would find their fortunes whittled away by inflation." Sandy Sheehy, Texas Big Rich, 1990.

Let’s read part of this again:

"…like his father before him…" this statement implies an idea & an established way of thinking that lasted for at least 2 generations.


And: "…those who were cash heavy, he predicted, would find their fortunes whittled away by inflation."

Let’s read all of this again so that hopefully its full impact & meaning will be drilled into our heads!!!

"…like his father before him, didn’t believe in keeping a lot of cash lying around: those who were cash heavy, he predicted, would find their fortunes whittled away by inflation."

Just this morning I had read that inflation was still no threat & very much in control. Let’s pause here and go over what I consider the 3 great myths of our present age & myths that developed during the 1990s.

3 GREAT MYTHS ESTABLISHED IN THE DECADE OF THE 1990s!!!

The first myth that really took hold in the 90s is that the stock market always goes up without suffering major & significant lasting corrections. Well my friends as we go into our 4th year of a down market this myth continues to come unraveled.

The second myth: Gold will not go over 300 an ounce again in our life times. Well, that myth has been shattered also as gold maintains its hold at around 350 dollars an ounce.

And what is this third, & in my opinion, the most significant myth that has been in our vocabulary since the 1990s? That myth is that inflation is subdued, under control & no longer a serious threat. Now consider the other 2 myths I spoke of. The perpetually rising stock market myth has been & continues to be shattered. The myth that gold would crash in value has been shattered & the original 300 dollar ceiling price has become the FLOOR price for gold. And what is the truth & reality about this silly thing called "inflation"?

Reading the passage in the book reminded me that throughout history & for most of the 20th century inflation has always been a major economic component of our lives. Remember that only during the 1990s did we really ever come to believe that the old nemesis "inflation" was finally whipped & totally subdued. But why is this myth & concept of inflation so important to dwell on and to understand?

It is important to understand because if we do not understand it we will make a mistake in how we invest & manage our finances & savings. And these mistakes will affect what we have or in what we do not have down the road. Look at the mistakes made by thousands of investors who were lead to believe that if they invested heavily in the stock market that over the long haul they would grow rich before they retired.

Religiously these poor souls believed in the mantra that stocks only go up & these investors bet all of their savings in their company 401K portfolios & now they cannot even retire because they have lost everything. My point is that we had all better come to an understanding of whether inflation is a myth or very real because if inflation is for real its affects & results will affect our finances in a far more destructive way than a stock market crash ever could!

Again, let me repeat that inflation historically has always been a part of our economic history for most of western civilization except for the brief time span of the decade of the 1990s. The prospect & reality of inflation was real during the 80s, 70s, 60s, 50s, and 40s. Even during the latter part of the 30s inflation was a factor. Only during the 1990s did we begin to discount the realities of inflation. And the decade of the 1990s were not normal years. The history books will eventually record that the 1990s were an anomaly that was quite unlike any decade before & a period of economic activity that was not likely to repeat itself again in our generational lifetime.

It is not my intent here to go into what made the 1990s so different economically but my point is to strive to get across that we now are just simply re-entering normal cyclical market behavior as we distance ourselves further & further from the last decade of the 1990s. And one of these normal economic facts is that inflation is real & very much a part of our society.

So again, my point is that not only will inflation return with a vengeance, but soon inflation will begin to play officially a very important role in our investment decisions. And if we come to the point where we believe in inflation & accept its inflating ways what investments have been known historically to do well in an inflationary environment? Of course all readers of these gold commentaries know the answer is gold.

As simple as these facts are it is important to understand that the trend is moving back to a respect & an acceptance of inflation. These past few years or so we have watched the myth of the stock market end & the market crash. We have observed the myth of gold’s worthlessness come unraveled. And now the final & greatest myth that will come unraveled is the myth that inflation is no longer a component of our economic lives.

Remember, the important concept to identify with is to understand the TREND now occurring. I covered this fact recently in other articles. No one can predict the date that such and such an event will occur and in my opinion the exact dates are not what is important. What is important to understand is the trend, trend & trend!!! What is that old statement, "The trend is our friend?" Well, the trend might not be our friend, but if we can prepare for it the trend will not destroy our finances when it arrives.

"An elite speculator doesn't care at all which way the markets are moving, he just wants to be "right" and recognize the TREND early enough to prudently deploy his own capital and be blessed to harvest profitable trades." Jesse Livermore

"Jesse Livermore is considered by many of today's top Wall Street traders as the greatest trader who ever lived. He sold the market short before the crash of 1929, and entered the depression with $100 million in cash."

Ok, let’s go over these old shattered myths once more so we can get a firm grip on where economically the economic world is heading:

1 We know that the stock market does not always go up for ever & when the correction comes it can last a very, very long time.


2 We know that gold is not worthless & that it is not forever trapped in a less that 300 dollar price range & that it can rise over 350 dollars an ounce.

3 And we must understand that inflation is returning again & when it arrives again & is accepted officially many investors will be wiped out by its income eroding habits.

It is only a matter of time before officially economists & money advisors will take inflation back into their studies & analysis & will advise investors again to consider investments that will out pace & keep up with inflationary forces.

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Hey! We finally had our first chance to get out of town since the Christmas Holidays. We headed to a little valley in the Southern Appalachian Mountains & visited a quaint little German Bed & Breakfast Inn called the Gaestehaus Salzburg. As it turned out our visit turned into an economics lesson as we heard from the host & hostess how the economic downturn has cut down on their business dramatically & on the number of guests making reservations & spending the night. Our hostess informed us that just 2 years ago guests would book reservations 6 months in advance but now their visits are impulsive & spur of the moment events. In addition to the economics lesson I got to learn what Wiener Schnitzel is! Personally, give me a good Bratwurst & leave everything else!

http://www.lemetropolecafe.com/