Do we really want $5,000 gold?

What does $5,000 gold really mean? Perhaps social chaos and, if so, who really wants that?

LONDON - 

General talk of gold as a potentially spectacular investment as opposed to an inflation hedge glosses over the true picture.  Over the ages, gold has kept up with inflation pretty well, and it will probably continue to do so in the future, but it may not make you wealthy, just protect whatever wealth you have.  True there have been periods when gold has outpaced the decline in currency values due to inflation, but that is usually when it is playing catch-up from a period of underperformance.

Now some ultra gold bulls out there are predicting $5,000 gold - or even higher.  While we think this unlikely in the foreseeable future, think what this means if it should come about.  It can only really happen if there is an equivalent decline in the US dollar - or the onset of hyper dollar inflation.  While some predict this also, the likelihood of a Zimbabwe situation with trillion US dollar notes buying less than a loaf of bread is hopefully rather more than we can see ahead.  If that should happen then $5,000 gold will be the least of what we should expect from the gold price.

But coming back to the arbitrary $5,000 gold level.  What this would imply is that the purchasing power of the US dollar would have sunk to around the equivalent of 20 cents today.  Your $500 computer would cost you $2500 or your dollar loaf of bread would be $5. So you won't really have gained anything in the purchasing power of your gold, you'll just have done rather better than most of your fellow men, and women, in retaining what wealth you already have.

 I can recall Ian Macavity at last year's New York Hard Assets investment conference, in talking about the economy and gold telling the gold bulls ‘be careful what you wish for'.  A wish for $5,000 gold could also mean a wish for a total breakdown in society as an increasingly worthless dollar would mean the have-nots would have even less, if that is possible, and many of the middle classes would be turned into have-nots.  Think Great Depression in spades - with perhaps a less disciplined, more violent, and gun toting, underclass than in the 1930s.  That's pretty unpleasant to contemplate, but a huge rise in the gold price could well mean just that.

The more likely scenario is perhaps a less steep decline in the value of the dollar, likely leading to a gradual rise in the price of gold.  True the dollar has made a bit of a recovery of late and gold hasn't really moved much one way or the other, but that's just because most of the currencies against which the dollar is valued are in just as bad a financial position - or worse.  Gold has recently hit a new high in terms of the troubled Euro for example.

Eventually the various stimulus programmes around the world, achieved by printing more and more money, backed by nothing more than a politician's wing and a prayer, will inevitably lead to inflation.  Prices will rise and the dollar will fall against currencies which matter - mostly those from the more resilient Asian economies - and gold will rise with it in dollar terms, if not in renminbi terms - but again probably not to the extent the true doomsayers project. 

In an interesting article in the Daily Reckoning recently, Bill Bonner waxed eloquent on what gold has meant to the holder of the metal over the ages.  One of his conclusions:  "Gold is real money. At least, it's as real as money ever gets. Gold represents wealth. It can be exchanged for wealth. And since the above-ground supply of gold grows about as fast as the economy itself, gold tends to hold its value over centuries. Today, gold is worth about the same as it was worth 2000 years ago."

In other words, gold won't necessarily make you rich, but it will help preserve your riches!  From time to time it will move above and below the inflationary trend and these movements, if judged correctly, offer buying and selling opportunities which can improve your wealth, but unless you have huge sums to invest, probably not significantly.

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responses to this article

Nice Article Nice article. Let's hope that things don't get that bad. by Matt R. on February 26 2010, 09:47 Find this comment inappropriate? Report it

5000$ Gold Dear Lawrence, You are in need of some new glasses, or something. Isn't it perfectly obvious that we desperately need a complete breakdown in society. Every course that is laid in is headed for unsustainability and disaster. There is . .more no hope for change from within the system and the sooner it all goes in the crapper the better for all. In fact, Larry, there is no way to avoid this happening already, the only choice is sooner(better for all) or later, (worse for all) So buy gold and silver and be around to pick up the pieces. . .less by silvergnat on February 26 2010, 14:27 Find this comment inappropriate? Report it

interesting and stabile staement. Gold or any other metal incline means one of two things.Either your economy is bogus right now with high inflation (gas prices causeing it with present infrustructure the problem) or the supply and demand for the metal's ( precious metals) are out . .more of sink with reality in the future's market paper trading arena.Wouldn't it be nice to walk into your bank and trade for metals with the paper you are holding if you want to. Then your trade would be the federal reserve interest rate. The people would actually own their money.Actually they would determine the price of gold by the cost of money.The federal insurance would be the gold you traded for the paper.What we have now and have had since Kennedy was assasinated is a lot of paper promises with no insurance. All coins minted in all metals should be determined by their scarcity and revalued as new developements in supply occur. I mean it makes since.To me.But so what.The way it is now people are controlled by facsist organizations called corporations controllled by money hustlers with mathmatical models that represent what they want you to do out of fear mostly. But they turn that around by saying gold and other metals are hoarded according to fear.I don't agree . .less by dan ss on February 26 2010, 14:34 Find this comment inappropriate? Report it

5000 gold Of course we don't WANT 5000$ gold, unless your a anti social psychotic anarchist....but when you've worked HARD your entire life and your Marxist government debases your currency to the value of a walnut ....it is what it is.....get on the boat or . .more tread for as long as you can. . .less by Mark on February 26 2010, 22:06 Find this comment inappropriate? Report it

5000 Gold It's too bad the article is titled "Do we want 5000 gold". NOBODY wants that because it implies that the reserve currency of the globe has vanished in terms of value. Those that choose to hold gold or various gold related stocks are hedging. The . .more price of gold if it was 5000/oz. is simply the outcome of an administration's display and repeat of the worst history has to offer in terms of currency debasement. After many years of work only suckers allow it to be taken away during debasement. . .less by Lou on February 27 2010, 03:08 Find this comment inappropriate? Report it

5000 Gold I don't see why we need a 50 percent devaluation of the USD to reach a 2200 USD goldprice. If wallstreet = washington wasn't playing nasty games with the gold price it would be much higher today! by Bas on February 27 2010, 04:33 Find this comment inappropriate? Report it

Peak Gold Why is it that every person who equates higher gold prices always harps on a breakdown of the US Dollar? ... haven't you done an analysis on supply/demand?; the yearly mine supply has been declining for the past several years, while yearly . .more consumption keeps growing. The supply/demand fundamentals for Gold are great! . .less by Peak Gold on February 27 2010, 11:52 Find this comment inappropriate? Report it

devaluation 2200 gold may register with your inflation calculator. However the debasement of the currancy is still in force.REally you can blame whoever and whatever you want for the problem. The cost of energy has risen fundamentally from infrustructure . .more that has not kept pace with environmental demands and selfish demands of a large portion of the population. Or at least some people call living beyound your means as selfish. But do not think that these people are stupid or do not know what they are doing,on the contrary the vast majority of them are regular people who sometimes actually think about what they are doing,they just don't voice it out of either respect or fear. That is a security issue which plagues getting anything done in an orderly manner. There are many ways and reasons to guess at what I may be getting at in the above paragragh. I will leave that to you while I already have my thoughts in order for the near future subject to change at any time as time goes by.5000 gold is just not a big deal depending on what it means to the vast majority. Nor is 81,000 or any number .Just depends. . .less by dan ss on February 27 2010, 12:18 Find this comment inappropriate? Report it

matt_alex_nel@yahoo.co.uk Gold should be there already and it will - gold is undervalued and silver. - US and other big institues have being playing the gold and silver markets keeping it low for ages and shaking off investors in the meantime - somehow they have made the . .more vast sheep of a public too believe gold is no good either - if you dont agree you are one of those sheep! . .less by Matt Nel on February 27 2010, 12:22 Find this comment inappropriate? Report it

Not necessarily If it is true that the gold price is artificially suppressed, then it is already worth $5000. So if the suppression scheme ended today, the true value of gold would be revealed with no connected loss of value in the dollar. That is, simply "pull . .more back the curtain" to reveal $5000 gold right now at current dollar values. . .less by Gabe on February 27 2010, 12:22 Find this comment inappropriate? Report it

5000 gold Great article LW. Great humor. You really had those bumpkins who know nothing about gold, money substitutes, chaos, society and profit/loss going. You almost had me believing that the greenback was safer than gold. But what really got me was . .more when I started believing that the $250 gold I bought a few years ago and continue to accumulate hasn't been profitable for me. Thanks for the education. Do you have any thoughts on gold confiscation to save society? . .less by Payai on February 28 2010, 06:08 Find this comment inappropriate? Report it

Why aim so low Of course we don't want $5000 Gold we want $85000 Gold at least.. by Gold Bull on March 01 2010, 03:34 Find this comment inappropriate? Report it

Your Math is Flawed Gold X 5, does not necessarily mean the cost of a loaf of bread with rise X 5. If gold was only an inflation hedge, you might be closer to right. Gold is actually an indication of a loss of confidence in government. Gold will end its rally when . .more government regains credibility. I'm not holding my breath. . .less by Nikku on March 01 2010, 13:45 Find this comment inappropriate? Report it

Cost of Bread The cost of bread is already approching $5.00. A loaf of Orowheat brand whole wheat bread costs, nothing fancy, already costs US$4.59 in Phoenix, Arizona, USA... I get the point of the story though. by Silverbare on March 01 2010, 14:30 Find this comment inappropriate? Report it

$5,000 gold The price of gold in 1913 when the Federal Reserve was created was $20 and some cents. Today it is 55 times greater, so what will happen in the future with the gross increase in inflationary purchasing media, being monitized through the Fed? Senator . .more Elihu Root (Nobel Peace Prize in 1912) described the Federal Reserve system in 1913 as an "engine of inflation". Average annual income in 1913 was $1,296; a loaf of bread was $0.06; a new car could be bought for $490 and a house for $3,395. The question is not the future price of an ounce of gold in dollars, but how many inflated dollars it will take to purchase this standard unit of value. Considering past history, an increase of less than 5 times doesn't seem improbable. . .less by William Melvin on March 01 2010, 15:17 Find this comment inappropriate? Report it

$5k gold $5k gold doesn´t mean necessary 20 cent on the dollar, or fivefold increase in prices. if you take the physical market of gold (not comex) - it´s tiny. when theres a run on physical gold caused by currency debasement or other reasons, then the price . .more of gold depends on the amounts of paper dollars chasing physical gold. that can increase the price of gold much stronger, than the price of consumer goods. . .less by alex on March 02 2010, 03:15 Find this comment inappropriate? Report it

$5K gold etc. Long memory.... 1940s silver @ 35 cents per ounce. Gold @ $35.00. It's called inflation and it is eternal. Coffee @ 5 cents a cup, a hamburger cost 15 cents, a home sold for $3,000. Remember? I thought so... by Ricardo on March 24 2010, 11:04 Find this comment inappropriate? Report it

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