Saturday, May 28, 2011

Where is the price of Gold going?

In a mid-year review of the world economy, the UN warned of a possible crisis of confidence in, and even a “collapse” of, the U.S. dollar if its value against other currencies continued to decline.

The report, an update of the UN “World Economic Situation and Prospects 2011” report first issued in December, noted that the dollar exchange rate against a basket of other key currencies had reached its lowest level since the 1970s.

This trend, it said, had recently been driven in part by interest rate differentials between the United States and other major economies and growing concern about the sustainability of the U.S. public debt, half of which is held by foreigners.

At another point the report referred to the “still looming risk of a collapse of the United States dollar.”

As this blog has stated on numerous occasions, the next decade is going to be all about debt. Specifically 'soverign debt'.

And it is the looming spectre of massive sovereign debt that drives our iron-clad belief that Gold and Silver will be going up significantly in value in the coming years.

And one of the clearest signs that this belief is not misplaced is that Central banks (who were net sellers of gold a decade ago) are now buying vast amounts of the precious metal to reduce their reliance on the dollar as a reserve currency.

In April the Gold price reached a record level 15 times different times month on demand from investors seeking an alternative to the US dollar.

China's Central Bank is one of the largest buyers of Gold.  China has already stated they are out to have more gold than America. China wants to show its currency has more backing than the U.S.

Russia is aspiring to the same, having purchased more than 8 tons in the first quarter of 2010.

India is also well known as having a voracious appetite for Gold.

In fact in 2010 central banks added 87 metric tons in official-sector purchases by countries including Bolivia, Sri Lanka and Mauritius, according to World Gold Council data.

And, as Zero Hedge notes today, the middle east is ramping up it's purchases of Gold too.

Jim Sinclair, perhaps the most successful commodities trader of all time and a frequent CNN and CNBC commentator, was one of the few who recognized what Gold was going to do in the 1980's.

Based on a simple formula, he predicted early in the the 70's (when Gold was at $35/ounce) that Gold would probably go to about $900 (the high was actually $873).

He has been predicting another Gold resurgence for the past 15 years.  The metal has already sourced from about $220/ounce in 2001 to over $1,500 an ounce today.

Where does Sinclair see Gold going this time around?
  • Because gold is held by many central banks, once as a reserve currency but now as an inventory currency, it functions as a swing asset to balance the International Balance sheet of the US.
  • Central banks are sellers of dollars but still hold, by default, large dollar inventories.
  • China has hedged its dollar position 50% through commitments to long term dollar commercial agreements, pay in, mineral, and energy deals internationally. That is an act of pure genius.
  • We can assume other central banks still hold 90% of their reported dollar positions, on average unhedged by commercial obligation positions.
  • In crisis times, the US dollar price of gold ALWAYS seeks to balance the International Balance Sheet of the USA.
  • Therefore: Take 90% of international US dollar debt less China and then add 50% of the US debt owned by China. Then divide that number by the ounces supposed to be owned by the US Treasury. The result is where gold wants to go.
  • In 1974 this gave me $900 gold.
So what do we get if you believe Jim Sinclair is, once again, correct about Gold?

From the most current TIC report:

Total Foreign Holdings of Treasury Securities: $4,479.2 Billion
-Less : China – Mainland (1,144.9)
-Plus: 50% of China – Mainland 572.5

Adjusted Foreign Holdings of Treasury Securities $3,906.8 Billion

Number of Fine Troy Ounces held in Custody by the US Mint for the US Treasury:

Note to Financial Statements 6, "Custodial Gold and Silver Bullion Reserves", page 59
Statutory value @ $42.2222 per FTO $10,574,053,000
Number of FTO 250,438,229

Valuation of Gold required to equal Adjusted Foreign Holdings of Treasury Securities
Adj Fgn Holdings $3,906,800,000,000
Number of FTO Gold at US Mint 250,438,229

Therefore Sinclair's formulat gives us a Gold price Valuation of: $15,600 per ounce

This is the level at which Sinclair believes Gold wants to go. And if Gold goes to that level, what about Silver? If Silver remains at it's approximate 37:1 ratio to Gold, we would then have a Silver price of $421/ounce.

If Silver goes back to it's historic average ratio of 16:1 to Gold, we would have a Silver price of $970/ounce.

If Silver overshoots to a ratio of 10:1 to Gold (as many predict), we would have a Silver price of $1,560/ounce.

In 1974 everyone thought Jim Sinclair was absolutely bonkers for predicting a $900/ounce price for Gold. By 1980 he was hailed as a genius. I am pretty confident even more people will dismiss his current prediction of a Gold price of over  $15,000/ounce.

It's all about Sovereign Debt. It's going to be an interesting decade.

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1 comment:

  1. Thanks for passing on the article and Jim Sinclair information. It never ceases to amaze me just how many people have no clue, as to what is happening with debt and excessive money creation. Zero Hedge had a link to an interesting Rob McEwen(ex Goldcorp CEO) interview where he made the point that if gold is not money, why would central banks hold it? Most people get very defensive when the topic of gold comes up and none more so than Garth Turner and many of his bloggers, even though gold had already gone up over 5x since 2001.