Yesterday, the Dow rose to a new record high. Oil moved back up too – to $55.
And gold rose again – to $648.
But let us try to ignore the noise of the news and the roar of the markets. Let’s look at the essential math:
Between 1995 and 2005, the supply of dollars -M3 – grew at about 10% per year. The feds aren’t talking any more, but we have no reason to think it has slowed down.
This does not include the extra liquidity through asset price appreciation, securitization, derivativization, and so forth – all of which seem to have grown at an even faster pace.
During this same period, the U.S. GDP grew about 3% per year. And the quantity of above-ground gold rose at about 2% per year.
Since gold represents a ‘money of last resort,’ it would be reasonable to expect it to rise in dollar terms. How much? When? Those are the big questions.
The yellow metal gained $150 between 2002 and 2005 – from $300 to $450 per ounce. Then speculators began coming into the market and prices became less stable. In May of last year, the price shot up to $730…then stumbled…picked itself up again…and now seems to be on the climb again. Even while other commodities have fallen – notably oil – gold continues to make progress. What this signals to us is that gold buyers are no longer treating the metal as any other commodity, but are buying it for its unique character as money; it’s the stuff to which people typically turn when they get worried about other stuff.
Why they might be worried about other stuff has been the subject of many of these Markets and Moneys. There is more stuff than ever before out in the financial world. $140 trillion worth, according to a recent estimate. Against that, there is only slightly more gold than there was 10 years ago.
Again the essential math:
There’s only $1.8 trillion in gold above ground. Over the last 10 years, at today’s prices, we estimate that about $300 billion of new gold was added to the world supply.
Meanwhile, the price of all other assets rose by an estimated $70 trillion (this is just a guess; generally the price of assets doubled during the past 10 years).
In other words, 10 years ago, there was one ounce of gold – at $300, more or less – for $31,000 worth of other stuff. Today, there is one ounce of gold for every $50,000 worth of other stuff. As much as $140,000 worth of stuff has been added for every ounce of gold…grosso modo…that came out of the ground in the last 10 years.
(Better check our math).
And again, the essential conclusion: Gold is likely to go up.