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How low can gold go? $587/oz!

By: Jason Hommel


-- Posted 21 February, 2007 | | Source: SilverSeek.com

Today, gold moved up by $23/oz., and was up by about 3.5% in nearly all currencies.  Does this mean that now is a risky time to buy gold?  Well, I think you have to look at the potential upside gains verses the downside risk.

In past reports, I've gone over how high the gold price can go, based, in part on the high price of gold in 1980 which was $850/oz., and doing an inflation-adjusted calculation based on money-creation rates.  

The way I do that is by looking at a measure of money in the banks, which is M3.  M3 in 1980 was $1.823 trillion, and today, M3 is about $11.5 trillion, (source: http://www.nowandfutures.com/key_stats.html).  The math is simple:  A possible high price for gold is $850/oz., times 11.5 divided by 1.823, which is $5,362/oz.

Another way to get a possible high price for gold is if all of M3 were to be fully backed by the official U.S. gold horde, of 261 million ounces (if such gold still exists), the gold price would be $44,000/oz.  

But I think it's equally important to focus on how low gold can go.  Clearly, I think everyone can agree that gold prices are not going to drop to $1/oz., or some silly low number.  Gold is always going to have some reasonable, minimum value.

And every investor ought to know about the possible downside of any investment.

One way to do determine that, is to look at a very low price of gold in the past, an unsustainable low price, such as $35/oz. in 1971.  At that time, gold was held at $35/oz. ever since the great depression, and gold could no longer be contained at such a low price as there was substantial money creation between the decades of the 1930's to the 70's.  So, I think it's also important to look at the amount of money, in 1971, that year of a historic low in the gold price.

http://www.federalreserve.gov/releases/h6/hist/h6hista.txt

From the Federal Reserve's Chart, we can see that M3 was 685 billion dollars in 1971.  

So, we take 11.5 trillion, divide by 685 billion, times $35/oz. to get our number.  Again, this will give us a reasonable "low of the low" price for gold, a true "inflation-adjusted" price that compares to $35/oz. in 1971.

That number, today, is $587/oz.!  

Surprisingly, gold was recently as low as $255 in mid 1999, almost eight years ago now.  At that time, there was less paper money than there is today.  In fact, you may not realize it, but in January, 1999, M3 stood at only $6.08 trillion, about half what it is today.  That means the 1971 inflation adjusted low price for gold in 1999 was $310/oz.!

Wow.  So, it really doesn't matter very much whether you bought gold 8 years ago, or today, you are still buying gold at near rock bottom, all time low, inflation-adjusted prices.

Let me give you a few analogies to show you how important this information is.

In the movie series, "Back to the Future" with Michael J. Fox, the bully ended up getting a hold of a book that recorded the outcome of future sporting events.  He used that information to make bets on who would win, and he made a huge fortune.

In an interesting book called, "Replay", the main character's old adult mind is sent back into his 18 year old body, so he gets to "replay" his life.  He uses his knowledge of the future in a similar way; at first, he makes sport bets, and then later to invest in things like Microsoft stock back when it would have mattered.

You can do almost exactly the same thing with the information I have just presented to you.  All you have to do, is buy gold.  Because it's like 1971, but probably only better than that today.

What's really better is silver.  In 1971, there was a whole lot of silver coinage that was no longer being used as coinage, because the silver content had risen past the metal value in the last year that they minted coins, in 1964.  

Today, however, a lot of that silver has been melted down and consumed by industry, so silver is both more rare, and much cheaper now, relatively speaking, than it was back then, when more people knew silver had value.

In 1964, a dollar's worth of silver coins were made up of 72% of an ounce of silver, so when silver was worth more than $1.39/oz., they had to stop making silver coins.  In 1964, M3 was $408 billion.  Today's 11.5 trillion divided by 408 billion, times $1.39/oz, is $39/oz!

Therefore, if you can buy silver anywhere below $39/oz., that's about as fortunate as it gets, because that would be like being able to "go back in time" and hoard silver coins in 1964.

Today, silver is $14/oz.  What a bargain!  Buying silver today, is like buying silver dollars in 1964 or for only 36 cents!

Today, a bag of 1964 silver coins containing $1000 face value worth of coins sells for about $9,000 for the silver value.

And remember, 1980's high price of $50/oz. for silver is $315 dollars in today's dollars.

I hope you enjoyed my view of history, and I hope you enjoyed our time travels.  See you in the future!

Thank you.

For Quick Reference:

1964 M3:  408 billion --last year of silver coinage ($1.39/oz. for silver, former low)
1971 M3:  685 billion --last year dollars could be redeemed for gold. ($35/oz. for gold, former low)
1980 M3:  1.823 trillion --high of gold ($850/oz.) and silver ($50/oz.)
2007 M3:  11.5 trillion

Silver's 2007 inflation adjusted low (from 1964): $39/oz.
Silver's 2007 inflation adjusted high (from 1980): $315/oz.

Gold's 2007 inflation adjusted low (from 1971): $587/oz.
Gold's 2007 inflation adjusted high (from 1980): $5,362/oz.



You can comment on this report at the "Hommel Forum" here:

http://hommelforum.com/showthread.php?t=29


-- Posted 21 February, 2007 | |

Last Three Articles by Jason Hommel


The Dollar is Done - Deal with It
7 November, 2011

BIS Changed Silver Data (From $203 to $93 Billion in Silver Liabilities?)
6 July, 2011

Dear Capitalists of the World
26 May, 2011

Silver Stock Report - Archive List

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