Historically – actually just up until the decades after World War I, when world governments started issuing paper currency with no relation to gold – the metal was cash, and it was used as money everywhere, on a daily basis. I believe that will again be the case in the fairly near future.
The question is: At what price will that occur, relative to other things? It’s not just a question of picking a dollar price, because the relative value of many things – houses, food, commodities, labor – have been distorted by a very long period of currency inflation, increased taxation and very burdensome regulation that started at the beginning of the last depression. Especially with the fantastic leaps in technology now being made and breathtaking advances that will soon occur, it’s hard to be sure exactly how values will realign after the Greater Depression ends. And we can’t know the exact manner in which it will end. Especially when you factor in the rise of China and India.
A guess? I’ll say the equivalent of about $5,000 an ounce of today’s dollars. And I feel pretty good about that number, considering where we are in the current gold bull market. Classic bull markets have three stages. We’ve long since left the “Stealth” stage – when few people even remembered gold existed, and those who did mocked the idea of owning it. We’re about to leave the “Wall of Worry” stage, when people notice it and the bulls and bears battle back and forth. I’ll conjecture that within the next year we’ll enter the “Mania” stage – when everybody, including governments, is buying gold, out of greed and fear. But also out of prudence.
The policies of Bernanke and Obama – but also of almost every other central bank and government in the world – are not just wrong. These people are, perversely, doing just the opposite of what should be done to cure the problems that have built up over decades. One consequence of their actions will be to ignite numerous other bubbles in various markets and countries. I expect the biggest bubble will be in gold, and the wildest one in mining and exploration stocks.
When will I sell out of gold and gold stocks? Of course, they don’t ring a bell at either the top or the bottom of the market. But I expect to be a seller when there really is a bubble, a mania, in all things gold-related. There’s a good chance that will coincide to some degree with a real bottom in conventional stocks. I don’t know what level that might be on the DJIA, but I’d think its average dividend yield might then be in the 6 to 8% area.
The bottom line is that gold and its friends are no longer cheap, but they have a long way – in both time and price – to run. Until they're done, I suggest you be right and sit tight.
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