In my last newsletter I wrote about the long-term potential for Gold Prices and shared my hypothesis that gold – as it continues to rise in the months and years ahead – will ultimately reach a lofty price. My hypothesis was based on a comparison of gold’s high of $850 an ounce (reached in 1980) to the size of the economy in 1980, the huge debt and deficits of today versus 1980, and the amount of money available to buy gold when it enters the frenzy stage. Before the bull market finely hits its top (which may be many years down the road), I believe these factors will drive the price of gold to a high that most would not believe possible at this time. In inflation-adjusted terms alone, gold would have to rise to approximately $2,250 an ounce today just to equal its high in 1980 of $850 an ounce.
Since gold peaked in January 1980, the statistics I will be using are calculated to the end of 1979, just a few weeks before gold’s ultimate peak. As 1979 ended, the U.S. economy, which was called the Gross National Product (GNP), was about $2,557 trillion. Today’s Gross Domestic Product (GDP) of more than $11 trillion exceeds that number by about five times.
At the end of 1979, the National Debt in the United States was $845 billion. Today it is more than $8.371 trillion and growing at the rapid pace of $1.75 billion per day. In other words, the debt is increasing by $845 billion every 483 days. Think about this for a moment: Every 483 days the National Debt increases, again, to the total amount of debt our country owed at the end of 1979.
The budget deficit for 2005 was estimated to come in just under one-half trillion
dollars. At the end of 1979, it was only $39.6 billion.
The Trade Deficit at the end of 1979 was a mere $24 billion. Just for the month of April 2006, the U.S. Trade Deficit amounted to $63.4 billion. Today the trade deficit for one month is almost triple the trade deficit for the entire year of 1979.
The National Debt, Trade Deficit, and Budget Deficit are growing at unsustainable rates. They have imploded since the 1970s. Yet, while these deficits continue to exert tremendous downward pressure on the dollar, they bode very well for the long-term outlook for gold.
At various times during past years, through exclusions, manipulations, and extremely
low interest rates, the budget deficit has had a positive appearance. But looks can be deceiving. In reality, we are all aware that many costs are not included in the government’s projected budget. Huge expenses are kept off the books, including the cost of the wars in Iraq and Afghanistan, the pilferage of the Social Security system, or what the government calls unfunded liabilities (to name a few). We probably haven’t had a true budget surplus for decades. To exacerbate an already precarious economy, the National Debt and the Trade Deficit continue to spiral out of control. As a result, while examining the long-term potential for gold in the last newsletter, I felt we had to consider both how large these three giants are today and how large they will be in the future, for instance: 5, 10, 15, 20, and 30 years from now. These factors are now, have been, and will continue to be in ensuing years, major forces behind the rising price of gold.
The other major consideration, and probably the most significant factor for the long-term potential for gold, is the amount of money that existed in 1980 versus the amount of money that exists today, not only in the United States, but worldwide. In the late ‘70s and early ‘80s, the New York Stock Exchange was trading less than 100 million shares a day. On May 19 of this year, the Exchange traded three billion shares, and it is not uncommon today to trade over 2.5 billion shares on the NYSE and NASDAQ in one day. The amount of money available in the markets and available to buy gold absolutely dwarfs the amount of money that was available in 1980, when gold reached $850 an ounce. It’s astronomical! Furthermore, the global market is also many times larger than in 1979 – and rapidly growing. China’s economy alone (which has 1.3 billion people) is growing at a rate of more than 10% per year.
Gold is an international commodity, and central banks from several different countries around the world now print their own money. When gold reaches the final stages of its bull market rise, there will be so much more money chasing gold than there was in the 1970s and early ‘80s, it will be like a stampede of elephants trying to get through a three-foot door.
The financial press likes to portray gold as though there is an endless supply, which, of course, is ridiculous. Gold has to be dug out of the ground by the labor of man and the sweat of his brow. It’s a tough, sometimes dangerous, job. Mines often run miles below the surface of the earth. I have read that since the time of Jesus the total amount of gold ever collected, panned, mined, or minted amounts to about $2 trillion.
On the other hand dollars (Federal Reserve Notes) are an endless supply. The Fed has been creating dollars at the rate of $ 1.5 trillion a year. Today there are trillions of dollars, yen, yuan, euros, and other monetary units traded in the world market on a daily basis. I believe this fact in-and-of itself will be instrumental in the months and years ahead and driving up gold prices.