How High Can Gold Go? Just Look At Oil, Equities, And Money Supply

Gold continues to set records, hitting a fresh nominal all-time high of $1,602.86 on Monday, as the shiny metal goes on an 11-day rally (its longest since 1980) and appears set to go higher. Concerns over the debt ceiling debate in the U.S., along with sovereign debt woes in Europe sending peripheral debt to nearly unsustainable levels, have put pressure on risk assets across the board and sent investors fleeing for safe-haven assets like gold and the Swiss franc. The question now is, how high can it go?

Gold is up 13% this year as measured by the SPDR gold trust ETF and has attracted a lot of attention, and capital, given record low interest rates in the U.S. and other developed economies, a weak dollar, and weak fundamental economic indicators across the world’s richest nations.

Gold is still well below its real highs, set back in July 18, 1980 when it hit what would be a price of $2,400 today, according to Capital Economics. While the situation was different back then, with double-digit inflation and geopolitical events fueling massive volatility (the Iranian hostage crisis and the Soviet invasion of Afghanistan were among the topics de jour).

The analysts chose to remain a bit more conservative, seeing the price of gold hitting $2,000 by 2012, but, given the current, crazy environment, they would “not be surprised to see prices reach this level sooner and then rise significantly further.” (Read Bernanke Fights Ron Paul In Congress: Gold Isn’t Money).

Gold will go as high as the dollar goes low. You can’t print money, making it worthless, and NOT expect to see gold prices “rise”. The value of gold is not RISING ... the PRICE of gold (in dollars) is rising. Because the dollar is worth less (worthless?) it takes more of them to buy the same ounce of gold. This is not rocket science ... why do people sit around amazed at this phenomena and wonder what is causing it? Gold IS the standard, too bad “rocket-scientist economists” refuse to say it.

-——safe-haven assets like gold and the Swiss franc-——

Others have problems of a different nature.

John Maudlin reported recently that on his trip to Switzerland, a Diet Coke cost $12. The appreciation of the Swiss Franc raises the price of commodities like Coke in Switzerland.

Other things were also outrageous in Switzerland.

——a gold standard produces trust in the dollar——

The problem today with money is evolution. The concept of what is money has evolved by definition and by technology. The supply of money needed has grown such that for ordinary transactions the gold to pay would be too small for convenience.

The concept of money that includes trust has resulted in an evolution that severs the tie between gold and faith. Gold is out, faith is in.

Then there is technology. There is an absolute need to transfer vast quantities of money quickly over long distances very securely. This process is accomplished by banks. In very recent time, the process has evolved to eliminate real gold, the physical documents called bills of exchange (letters of credit) and other paper including physical currency.

The evolutionary result is a host of electronic ledgers maintained by international banks that represent all the wealth of the combined national entities. Trade is accomplished by zapping entries from one ledger to another. The gold or the sacrosanct paper bills of exchange need not really change hands. There just isn’t time. The effort and cost of the effort is just too great.

The system worked well except for the public greed. The people of the various nations demanded more and their elected politicians gave it to them. The more was created using various political devices that undermined the trust and faith. The faith in the government backing the currency has disappeared or is lessening. The recourse is to abandon faith and revert to solid, real value. There are many sources of real value but for the purpose of a monetary system, Gold and or silver are the tried and true, proven by thousands of years.

The problem becomes one of evolution. How does an electronic system of exchange based totally on trust and respect evolve into a workable system having gold and silver as a rock solid basis?

It will be interesting to watch. Meanwhile, owning some gold and silver is prudent.

What I am puzzling over is this:

Oil price and natural gas price decoupled about 3 years ago from the calorific equivalent of 6:1 or 7:1. Lately it has been more in the vicinity of 25:1, four times the calorific alue. That is due to the low level of substitution of oil buring for electricity generation, and unique demand for oil as a feedstock for polycarbonates.

Gold seems to have decoupled also from its traditional value ranges with silver, as a metal of industrial value, and then silver in turn decoupled from other precious metals and started to track gold gone wild. There was a brief adjustment, but the march is on again.

It seems as though gold lately is also stronger than oil, and the oil-gold-dollar see-saw is breaking down.

People are frightened of the deficit governments, and fear oil pricing now because a broken economy cannot pay for $5/gal gasoline.

I believe, jumping to the admittedly poorly supported conclusion, that what we are seeing is a de-coupling of gold from all commodities as a fear investment, and what we could see before the recession is over is $3000 gold or $10,000 gold or whatever it goes to, and it just stays there, independent of the economy. Certainly $2000 gold before year end, that is a modest ~25% rise, comparable to recent history.

Can/will this happen?

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