Gold Could Reach $20,000/ozt. by 2020 – Without Hyperinflation! Here’s How

Why Gold Above $15,000 Per Ounce By 2020 Is Realistic Without Hyperinflation

Today’s gold price of $1500+ is low…if I compare it to all other financial assets…[and if] I compare it to returns achieved since 1976 from the stock market and to the growth in US Federal liabilities. [Frankly, I can justify a price as high as $20,000 per troy ounce as early as 2020 and that is even without hyperinflation. Let me show you why.] Words: 1343

So says DoctoRx (www.dailycapitalist.com) in an article*which Lorimer Wilson, editor ofwww.munKNEE.com , has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. DoctoRx goes on to say:

Gold has been vastly higher relative to other financial asset prices at times of extreme financial conditions in the past. Fund manager John Hathaway, an expert on gold, said in 2008:

“We calculate the market cap of all above ground gold, including central bank reserves, equals about 1.4% of global financial assets. In 1914 and 1982, when investor stress reached extreme readings, that percentage was between 20% to 25%.”

Gold at $20,000/ozt. by 2020?

Assuming the 1.4% ratio Hathaway referred to in 2008 is now somewhat higher (perhaps 2% now), one can simply multiply gold’s price by 10 to get to a percentage of global financial assets that it had at times of crisis last century. That already gets one to around $15,000/ozt. today. (This analysis assumes other asset prices stay the same as they are now.) Allow low annual growth from there for 9 years and you get to $20,000/ozt. by 2020. Obviously of course no one expects gold to suddenly rise by ten times but over the months and years, strange things can happen. [$20,000/ozt. by 2020 is the highest estimated parabolic peak price put forth by 130 analysts identified in this (1) article.]

Gold traded at $140 per troy ounce [to understand the significance of the term "troy" read this(2) article] 35 years ago, shortly after it again became legal for American citizens to own it. If it had appreciated 9% annually since then, its price today would be $2,857/ozt. If it had risen as fast as the Dow Jones Industrial Average, which I place at 900 then with an estimated dividend yield over the years of 4%, then gold would today be at $7,302/ozt. If gold were to continue averaging a compounded price appreciation rate of 11.66% from the 1975-6 price of $140/ozt. until 2020, one gets $20,000 per troy ounce.

If you think any of this is extreme, or is but idle numerology, please think again. Our system of money is based on debt. The Federal government issues bonds, the primary dealers buy the bonds, and then the Federal Reserve Bank of New York creates base money out of thin air by purchasing the debt from the primary dealers. This is how electronic dollars are created, and these dollars can be turned into paper currency at the request of depositors. Our paper money is a “note”, meaning a debt, though in a circular fashion it is only redeemable in its own form, namely other notes (or coins). This distinction between paper money that is also a debt obligation versus something on the order of scrip that one might find (or have found) at a military PX is at the core of much debate and confusion, but that’s a topic for Econophile or others more knowledgeable than I.

Here are more numbers that I think prove the reasonableness of the above analysis.

The Federal debt was $635B in 1976. Since LBJ had already put Social Security revenues into the general fund and because Medicare had come into existence with unrealistic cost estimates, there were probably already other unfunded and unaccounted-for liabilities, so I’ll estimate a total Federal liability, both on- and off-budget, in 1976 of $1T. In contrast, recent estimates of on-budget debt and off-budget unfunded Federal liabilities are, per USA Today, over $50T. (This analysis uses dollars as they were valued at each date and are NOT adjusted for purchasing power inflation.)

The compound growth rate of 1 growing to 50 over a 35 year span is 11.83%. Now let’s go back to gold. If the price had risen from $140 per troy ounce at an 11.83% annual rate for the past 35 years, it would now be about $7000/ozt. If we instead used the latest estimate of Federal liabilities of $61.6T and my (arbitrary) starting point of $1T, we get a compound growth rate of 12.49%. An equivalent rise of gold’s price would be to $8,612/ozt….[and] if gold “should” be at $8,612/ozt. today to have kept up with the growth rate of Federal liabilities, an annual growth rate of only 10% from $8,612/ozt. gets the price to$20,000/ozt. by 2020.

One could go on almost ad infinitum. The bottom line is that if gold is, and remains, the monetary metal, as President Nixon signified 40 years ago when he chose to default on the U.S.’s Bretton Woods commitment in order to hold onto the remaining gold, then, assuming the government is going to take the usual statist path and meet its debt commitments by inflating them away, gold can be re-valued vastly higher without hyperinflation. (I am expecting high inflation in such a situation.)

Conclusion

In summary, a simple analysis of compound rates of return of assets such as the DJIA and, separately, the liabilities of the sole remaining monetary and military superpower, indicate that gold may well be substantially undervalued. Should times of true panic occur and gold be re-valued to an extreme level as has occurred before (and after which the economic world in fact kept turning), prices in the $15,000-$20,000/ozt. range could become fair market prices simply by preference of investors, again without using hyper-inflated asset values as comparators.

None of this is a prediction. For all I know, governments will band together to demonetize gold and will enforce that decision by force. Or gold will simply sink in price for any set of reasons, or from a “random walk”. If one is going to do as I have done, however, and allocate a significant percentage of one’s savings to gold-related investments, it is nice to believe that there is substantial real upside, not merely that of keeping up with price inflation. More importantly, the above numbers demonstrate the point that financial theorists know, which is that while buying “right” is important in the short term, buying the right asset at around a reasonable market price for the long term is the most important thing.

I believe that per the above calculations, a sound case exists that gold may appreciate substantially over the long term relative to other goods and services. This potential appreciation has nothing to do with it as a commodity, in which case I would perform no such analysis. It is because gold continues to be what it has been for many years – a store of wealth – that I feel it is reasonable to think about it in this manner.

There are certain things that have absolutely no equivalents or substitutes. There is only one United States of America with its dollar, “backed” by the full faith and credit of the Federal government. As of June 2011, there is exactly one generally-accepted monetary metal: gold.

I think that people who buy their goods and services with dollars and who have dollar-based savings should think deeply about the possibilities for the key financial ratio of the future, namely that between the two most important and most different moneys of the world, gold and US dollars…

*dailycapitalist.com/2011/06/07/why-gold-above-15000-per-ounce-by-2020-is-realistic-without-hyperinflation/

Jim Rogers: Rogers: Only a Crisis Can Fix U.S. Debt Problem

In an interview with WSJ's Simon Constable, famed investor Jim Rogers weighs in on what it will take to solve the U.S. debt crisis, why he's shorting U.S. tech companies, why the stimulus package was a bad idea, and the looming energy crisis.

Safety Plays from Hilary Kramer: KFT, TEF, NGG

TOM HUDSON: As stocks have moved lower this month, investors again learn the lessons of diversification and defense. Tonight`s "Street Critique" guest finds safety in food, electricity, and telephones, and some of it oversea. Hilary Kramer back with us, editor at gamechangerstocks.com.

HUDSON: Hilary, your safety picks here we`re going to talk about, also sport higher dividend yields than most U.S. government bonds these days. We`re going to begin with Dow component Kraft (NYSE: KFT) Food, K-F- T is one of your safety plays. The stock has had a nice rally this spring and has held on to most of it. What fuels it from here?

HILARY KRAMER, EDITOR, GAMECHANGERSTOCKS.COM: Well, Kraft (NYSE: KFT) required Cadbury, the European chocolate-maker. So if Kraft (NYSE: KFT) can take some their Oscar Meyer wieners, and some of the Philadelphia Cream Cheese and Oreos, and uses that distribution network, leverage off of it, you could see Kraft (NYSE: KFT) become even more of an international diversified play. And I`m not so worried about commodity prices. As they moderate, Kraft (NYSE: KFT) is going to do really well. You have a lot of upside and a lot safety in Kraft (NYSE: KFT), K-F-T.

HUDSON: You mentioned international growth being a potential for Kraft (NYSE: KFT). And you do like some international ideas, including the Spanish telecom Telefonica, T-E-F, the ticker symbol. Big dividend yield, 8 percent, the stock has been kind of choppy. And it`s interesting because most of its business is in Latin America, not Sprain, right?

KRAMER: Right. Telefonica, T-E-F, known as Telefonica de Hispana formerly, is totally misunderstood, just because it`s a Spanish-based company doesn`t mean that their debt is a sovereign debt problem with Spain, OK, you know, could be defaulting.

Telefonica operates (INAUDIBLE) in Brazil, they`re across Latin America. No matter how bad the economy is, people are still moving to cell phones. And this is a mobile play, fixed line, data communication, T-E-F. And you can`t go wrong with that dividend. Telefonica is here to stay for a long time, a great stock for your portfolio and for some protection.

HUDSON: You also like a different kind of fixed line, and that being electric utilities. National Grid is your idea here, it operates in the U.K. as well as in New England here in the U.S. A pretty good-looking stock chart, has been dropped off from its recent high lately, but again, another big dividend yield here for this utility.

KRAMER: Right. This -- 6 percent on National Grid, N-G-G. A lot of people haven`t heard of N-G-G because it`s a U.K.-based utility infrastructure play. But they have bought up National Grid via these plum properties, these plum utilities across the United States mainly the Northeast. A very profitable company, growing, but I`m really recommending it for the safety. It`s a great way to be in a utility, but to have geographical diversification so you don`t have regional risk that can happen with bad weather, for example.

HUDSON: Sure. Let`s get to some viewer e-mails asking for some updates. John sent us this note asking about Telvent, it has received a buyout offer. And the stock has appreciated significantly. "Does Hilary recommend selling or holding?"

You first mentioned this back on December 30th, 2009, when it was $38 and change. The buyout offer that it received a few weeks at $40. How about it, do you take it?

KRAMER: Take your money. Take it off the table. Deploy it in other opportunities, especially in this down market here. But it did get acquired, if you went in it, you made -- you eked out a little bit, it`s nice change for yourself.

HUDSON: Are you selling your position in Telvent here?

KRAMER: Yes, yes. And I`m recommended subscribers to newsletter sell and take that $40.

HUDSON: What about the other three safety picks, disclosures, do you own those?

KRAMER: No, I`m just in the process of selling the Telvent.

HUDSON: There we go. You can e-mail us, that address is streetcritique@nbr.com. Of course, we`re online elsewhere on Twitter and on Facebook. More questions next week. Our guest with "Street Critique," it`s Hilary Kramer, gamechangerstocks.com.

Many of us won’t be able to retire until our 80s You’ll probably have to work much longer than you anticipated

We all think it’s a panacea. If you don’t have enough money saved for retirement, you’ve got a few ways to close the gap between what you have and what you need in your nest egg: Save more, invest more aggressively, and/or work longer.

Well, it turns out that working longer is indeed an option, according to the Employee Benefit Research Institute latest study. The only problem is that the latest research shows that you’ll have to work much longer than you anticipated. In fact, many Americans will have to keep on working well into their 70s and 80s to afford retirement, according to the study, titled “The Impact of Deferring Retirement Age on Retirement Income Adequacy.”

What’s more, it’s even worse for low-income workers, according Jack VanDerhei, one of the co-authors of the study. Those who earned (on average over the course of their careers) less than $11,700 per year, the lowest income quartile, would need to defer retirement till age 84 before 90% of those households would have just a 50% chance of affording retirement.

Those who earned between $11,700 and $31,200 will need to work till age 76 to have a 50% chance of covering basic expenses in retirement. Those who earned between $31,200 and $72,500 will need to work to age 72 to have a 50% chance and those who earned more than $72,500, those in the highest income quartile, catch a break; they get stop working at age 65 to have a 50/50 chance of funding their retirement.

So what can be done to make sure you have enough income in retirement? Well, the sad truth is that not working is no longer an option and working past age 65 is fast becoming a fact of life, at least for those in the lowest three income quartiles.

One bright spot, according to John Nelson, co-author of ‘What Color is Your Parachute? For Retirement’ is that working works: “For those in the lower half of the income spectrum, delaying retirement from 65 to 69 has a profound effect,” he said. “It increases retirement income adequacy by 25% to 50%! That’s a powerful incentive.”

The new normal

Now the reality about EBRI’s findings is that many Americans — who are able to continue working and whose skills are still in demand — are already working past age 65. In 2009, 17.2% of Americans age 65 and older were in the labor force, according to recent AARP Public Policy Institute report, “Family Income Sources for Older People, 2009.”

And about 14.2 million older persons (36.7% of the older population) had family incomes from earnings in 2009. The median family income from this source was $32,330, while the mean was nearly 1.6 times as large — $50,971. Read the AARP report here.

And the new normal isn’t that people are working past age 65, rather it’s this: They are also hunting for second jobs as all, according to Art Koff, founder of RetiredBrains.com. “Even those older Americans who are still working are looking for ways to make additional monies,” he said.

And many, judging from the page views at RetiredBrains.com’s website, are often exploring ways to work from home. “Those older Americans who are looking for a job, those who have already retired and those who are working but need additional income or want to start something that they can continue into their retirement years are all reading (the work-from-home) pages,” Koff said.

Making it work

To be sure, many Americans haven’t figured out how to make working later a real option, instead of just a fantasy. And for them, Nelson has this advice: “You need to pay attention to your career and your health.”

“First, for your career, do some in-depth research and planning. Second, for your body, take a health risk assessment. You may need to keep both of them in shape longer than you thought,” he said.

Work and save

Working past age 65 is certainly one way to make sure you have enough income to fund retirement expenses. But EBRI also noted that Americans who work past age 65 who continue to save for retirement in a 401(k) or some such account earmarked for retirement increase the odds of having enough income in their golden years. “One of the factors that makes a major difference in the percentage of households satisfying the retirement income adequacy thresholds at any retirement age is whether the worker is still participating in a defined contribution plan after age 65,” the co-authors of the report. “This factor results in at least a 10 percentage point difference in the majority of the retirement age/income combinations investigated.” The EBRI report can be found at this website.

A new compact

Others, meanwhile, have a different take on EBRI’s study and findings. “This report just reinforces the need for a new social compact that provides increased financial security in return for increased contribution,” said Marc Freedman, author of “The Big Shift: Navigating the New Stage Beyond Midlife and CEO of Civic Ventures.”

“We need to enable the many people who want and need to work longer, without hurting those who are not able to,” Freedman said.

China ratings house says US defaulting: report

A Chinese ratings house has accused the United States of defaulting on its massive debt, state media said Friday, a day after Beijing urged Washington to put its fiscal house in order.

"In our opinion, the United States has already been defaulting," Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying.

Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies -- eroding the wealth of creditors including China, Guan said.

Guan did not immediately respond to AFP requests for comment.

The US government will run out of room to spend more on August 2 unless Congress bumps up the borrowing limit beyond $14.29 trillion -- but Republicans are refusing to support such a move until a deficit cutting deal is reached.

Ratings agency Fitch on Wednesday joined Moody's and Standard & Poor's to warn the United States could lose its first-class credit rating if it fails to raise its debt ceiling to avoid defaulting on loans.

A downgrade could sharply raise US borrowing costs, worsening the country's already dire fiscal position, and send shock waves through the financial world, which has long considered US debt a benchmark among safe-haven investments.

China is by far the top holder of US debt and has in the past raised worries that the massive US stimulus effort launched to revive the economy would lead to mushrooming debt that erodes the value of the dollar and its Treasury holdings.

Beijing cut its holdings of US Treasury securities for the fifth month in a row to $1.145 trillion in March, down $9.2 billion from February and 2.6 percent less than October's peak of $1.175 trillion, US data showed last month.

Foreign ministry spokesman Hong Lei on Thursday urged the United States to adopt "effective measures to improve its fiscal situation".

Dagong has made a name for itself by hitting out at its three Western rivals, saying they caused the financial crisis by failing to properly disclose risk.

The Chinese agency, which is trying to build an international profile, has given the United States and several other nations lower marks than they received from the the big three.

Homebuilders and Shanghai Index break down at the same time!

It's Friday, and Chris "Just the Facts" Kimble returns for a cameo Dragnet impersonation, this time with a look at a similar pattern in a pair of assets not normally thought of in the same context.

Click for a larger image

Chris comments: The Shanghai Index and homebuilders both have broken out of multi-year flag/pennant patterns — to the downside — at the same time.

Not good price action from these two leading indicators!

Oil Production & Consumption