The Continuing Bull Market in Gold: How High Can It Go?

0:00You know right now the economic statistics are very rosy, unemployment's real low, inflation's real low, housing starts at an all-time high and the value of the dollar is strengthening and the price of gold has been declining since I agreed to give this talk so I've been doing a little retooling and I was thinking of calling it, how low can it go? But actually I am optimistic about the price of gold and there are many others who are also optimistic making predictions that the price of gold will average $435 or $465 or will hit $475 this year.

0:50Other predictions, looking out a little longer time horizon, see gold at $500 an ounce, or $600 an ounce, $700 an ounce, $1,000 an ounce, $1,265 an ounce, and even higher, $3,000 an ounce. So how high or low can the price of gold go? My thesis today that I want to present to you is that all the above mentioned forecasts are correct and that they are incorrect. The price of gold will go to $4.30, $4.65, $4.70 probably this year, although I have to admit that I wouldn't be surprised if the price of gold weakened a little further in 2005.

1:45But gold will reach $500 an ounce, $600 an ounce, $7, $1,000, and even $1,265 an ounce. The answer is that they will. The price of gold will reach those heights. However, the reason for this affirmative and quite bullish answer also implies that the price of gold will go even higher. In fact, it implies that gold will go past $5,000 an ounce and past $10,000 an ounce. Discounting any newsmanic value for paper dollars, the ultimate price of gold will be infinity. That's correct. Those in charge of the printing press will continue to print up dollars until they drive have the value of the dollar to zero, making the price of gold infinite in terms of dollars.

2:42They will destroy the dollar because they have the power to do so. Now I know some of you are thinking that Thornton may be a little crazy, or that he is planning on publishing a book, something along the lines of Dow 36,000, surely you would think I think that the powers that be in Washington D.C. had better sense, that they would look at the situation rationally, that they would pull back, that they would not ruin the goose that laid the golden egg, the power that allows them to write bad checks year after year to the tune of trillions of dollars. But I'm not calling their rationality into question. They will pull back. They will get together with their monetary buddies, the central banks in Europe, Japan, China, and so forth.

3:40They will make agreements for the purpose of re-establishing monetary stability and to realign exchange rates, but they will not truly mend their inflationary ways of their own accord. The key here really is the rationality of the people, you and me, all of us. Eventually, we the people will realize that the politicians and central bankers have no real plans of stopping inflation. They talk a good game, but eventually the people will realize that it's pretty much all a lie and this will lead them to hold fewer dollars and this will fuel the depreciation of the purchasing power of the dollar and a higher price of gold.

4:31As Mises said, they will only stop inflating when the people realize that they're never going to stop inflating. The value of the dollar has already lost 95% of its purchasing power since the founding of the Fed, at least in terms of CPI, the Consumer Price Index. But CPI systematically underreports inflation. Of course, most mainstream economists think the opposite of that. They think that the CPI overreports inflation. For example, when people economize by buying fewer high-priced goods, those goods go out of the basket and cheaper goods go into the the Basket. When companies improve the quality of their product, mainstream economists want to take that into account in CPI, or technological advances, or gains in productivity. It seems that in this tainted mainstream view, every time the market does something good for us, they want to give credit for all of that to the Federal Reserve in terms of reducing the The impact of monetary inflation on price inflation.

5:47So really the value of the dollar has already lost more than 99% of its value. Many of you have heard the story of the frog where if you throw a frog into boiling water it jumps out. But if you put it in a pot of warm water and slowly turn up the heat, the frog will allow itself to be cooked and killed. Well this is an urban legend. If you throw a frog into boiling water, it is killed basically, it dies. But if you put a frog in warm water in a pot, it'll sit there and whenever it gets too warm, it'll jump out. Frogs are not that stupid and I think the same thing is analogous to the people, eventually if the heat gets too hot, we're going to jump out.

6:41And of course, they've already turned up the heat on us. When we went off the gold standard in the early 1970s, of course, inflation has increased, price inflation has increased, and the value of the dollar has decreased at a much rapid pace. So the case against the long-term health of the dollar essentially lies in that area of and the people realizing that they're not going to stop inflating and that we're going to jump out in terms of storing our value in dollars and bonds and cash and things of that nature, life insurance and that eventually when it becomes technologically possible we will jump out of the dollar in terms of using it as our unit of account and at that point you basically are staring a hyperinflation to Face. The federal government deficit continues to increase. The government debt continues to increase. Of course, Social Security, they're working on it, but they're not fixing it.

7:49They're making the problem, the ultimate problem, much larger. In the US, we face a larger population of what some people call tax eaters, the people who receive our tax dollars. And while the and the population of tax producers grow smaller, and of course we also have the problem, the looming problem of rebalancing world economic power between the Euro, Japan, China and India and the problems of empire that face us today. So I want to at this point just take a quick run through some of the statistics and look Look at the picture in order to back up my claim that we're heading for the ultimate demise of the dollar, whether it's through an all-out hyperinflation or a jumping over to the gold standard.

8:49This is the federal budget deficit over time, jumping back to the turn of the century actually, And you see that basically we have a relatively balanced budget up until the early 1970s when we went off the gold standard. And then we look at the federal debt and we see the same picture, basically very little federal debt over time. And then we hit the 1970s, early 1970s, Nixon takes us off the gold standard and the federal debt is climbing like a mountain. The third chart shows household debt, similar picture, looking at the, you know, fairly low levels of household debt.

9:42Debt, and then in the early 1970s we see a takeoff in terms of household debt, and now we just broke through $10 trillion in household debt, and that's credit cards, home mortgages, things of that nature. Consumer price index, which measures inflation, relatively stable, relatively flat, climbing The exchange value of the dollar is a measure of the value of the dollar in terms of other currencies around the world. While most people think of the US dollar as one of the stronger, more dominant currencies, This chart actually shows a trend that is downward so that the U.S. dollar is actually losing value in terms of the value of the currencies of our trading partners.

10:44It also shows the dollar currently above the bottom trend line so that we're headed lower in terms of our dollar versus other currencies around the world. And then this is the real culprit, the money supply. This is the M3 measure of the money supply, the largest measure of the money supply. Throughout the 1960s, the M3 money supply was less than $1 trillion. Today we're approaching $10 trillion. So we've had a thousand percent increase basically, roughly over the last 35 years.

11:34The building block of this supply of money is the monetary base that's directly controlled by the Federal Reserve, a similar picture, again pointing to the, when we went off the The gold standard in 1971, the monetary base was less than $100 billion and today it's approaching $900 billion. That's the basic ingredient that the Fed introduces into the banking system which is blown up or inflated by the banking system that creates monetary Monetary Inflation and ultimately Price Inflation. The next graph is a different version of that, the St. Louis style monetary base.

12:24That shows an even more dramatic, faster rate of increase in the monetary base. That little blip up here in the year 2000 is when the Fed saved us from the Y2K virus by putting in massive amounts of emergency monetary base, mostly thanks to Gary North I guess. The trade deficit or surplus, again a very similar picture, the line is flat, the line The line is stable, there's obviously a lot that's actually going on in some of these statistics, but we hit 1970 and all of a sudden you see the line becoming destabilized in both directions.

13:18But eventually, a trend emerges that shows larger and larger trade deficits. So that basically we're paying more and more for imports with paper dollars. The gold stock price index from 1985 to the present, it shows that when we went down in the boom of the late 1990s, the price of gold and the gold stock index sank down, but since that time, the gold stock index has rallied in a very significant way by over 50%.

14:08The longer term picture is in the price of gold. Here we're looking at the price of gold from 1975 to the present. And I've drawn a trend line from the high price in 1980 down to the lower lows of the 1990s. And basically what it shows is that this recent rally in Conclusions Gold and gold mining stocks have corrected and could be in a short-term bear market. Likewise, The dollar has stabilized and could strengthen during 2005. Also efforts are underway in Washington D.C. to curb the budget deficit and to fix Social Security. These efforts are basically cover-ups. Federal spending and borrowing will continue to grow and privatizing and Social Security does nothing to fix the long-term financial problems of the system.

15:30The long-term outlook for gold and other inflation hedges looks bright. There is a secular bull market that started in 2000 and this is still in place. Nothing but the return of the gold standard will basically prevent continued inflation and eventual hyperinflation and and the ultimate demise of the dollar.