What Happens to Gold When High Inflation, Excess Cash, and Falling Dollar Jolts Economy?

Gold isn’t going to $2,000 an ounce.

Before you gag on your coffee or suffer chest pains, allow me to explain.

We’re about eight years into the bull market, and gold has breached the $1,000 level twice and has spent weeks trading above the old high of $850. Some observers are now saying that gold’s pretty much had its day and that once the recession is over, it will retreat for good.

However, the four-digit gold price we’ve seen so far is with no price inflation to speak of, no effects of the atrocious increase in the money supply, and despite a rising dollar. What happens to gold when each of those pictures gets turned upside down – high inflation, excess cash jolting the economy, and a falling dollar? After all, gold’s performance to date has been powered only by general anxiety, not by any visible erosion in the dollar’s value.

I decided to take a fresh look at calculations that could be used to appraise gold’s upside potential. Not one of them, by themselves, comes with compelling logic. But they all point in the same direction.

Gold’s Percentage Rise in the Last Bull Market: What if gold in this bull market repeats the percentage rise in the last bull market? In the 1970s gold rose from $35 to $850, a factor of 24.28. Our low in 2001 was $255.95. Multiply that by 24.28 and you get a gold price of $6,214 per ounce.

U.S. Gold Holdings to Money Supply: The M1 money supply consists of currency and checkable deposits. The U.S. government currently holds 286.9 million ounces of gold. If the government were to make each dollar redeemable by the amount of gold it possesses, we’d arrive at the following price for gold: $1.569 trillion ÷ 286.9 million oz. = $5,468.80 per ounce.

Gold/Dow Ratio: The ratio was about “1” when gold peaked in 1980, meaning the Dow and gold were the same price. To restore that relationship at today’s stock prices would mean when the Dow is at 6,626, gold should be at $6,626/oz. Of course, we think it likely that the Dow will get a lot lower before gold peaks. But even if it drops all the way to 4,000, that would imply a gold price of $4,000/oz.

All the Money in the World vs. Gold Reserves: If the public eventually sees the paper game being run by the central banks for what it is, governments will be forced to back their currencies with gold (and perhaps other tangibles like silver). Assuming they had to go into the market and buy the gold needed to restore faith in their currencies, the numbers might look like this: Total central banks reserves (including gold holdings) = $4.8 trillion, divided by 929.6 million ounces total gold reserves held by all official institutions that issue currency = $5,246 gold price.

U.S. Gold Holdings to U.S. Foreign Trade Deficit: The size of a country’s deficit or surplus would be of no consequence if all currencies were convertible into a fixed amount of gold. However, the dollar is increasingly considered a hot potato, and when the trade balance reverses, as it must, dollars will flow back to the U.S. and fuel domestic price inflation. Based on the cumulative trade deficit of $9.13 trillion (up from $6 trillion since June ’07!) and U.S. gold holdings of 286.9 million ounces, the corresponding price of gold would be $31,822 per ounce.

U.S. Gold to U.S. Government Liabilities: Finally, the GAO (Government Accountability Office) calculates an income statement and balance sheet for the U.S. government. As you’d suspect, it is dominated by future liabilities for Medicare and Social Security. What if they had to be backed by the supply of gold? Official U.S. government liabilities now ring in at an incredible $55.2 trillion. To make good on that would require a $192,401 gold price.

No, we don’t think gold will hit $192,000 or even $32,000. And there really isn’t any surefire way to forecast the eventual high. But it’s clear that every weathervane is pointing in the same direction. So, yes, gold isn’t going to $2,000; it’s going higher.

When determining how to keep your wealth safe, the state of global affairs can be a powerful reminder that gold should be part of the strategy. And today our world, essentially, is on fire.

  • Eastern Europe borders on bankruptcy. Brazil’s economy is falling off a cliff. Ditto Mexico.
  • Protests have erupted in Latvia, Chile, Greece, Bulgaria, Iceland, Dublin, and parts of the U.S. Workers have gone on strike in Britain and France.
  • In the U.S., 36 states and the District of Columbia have proposed or implemented reductions in the civil workforce. (You think customer service is poor now…)
  • An astounding one in nine homes, 14 million, sits empty in the U.S. The December median price of a home sold in Detroit was $7,500. More than 8.3 million homeowners were upside down on their mortgage in the fourth quarter. Freddie Mac’s new CEO resigned after six months on the job.
  • Last quarter, 12 U.S. banks failed, bringing the 2008 total to 25, the highest one-year death rate since 50 failed in 1993. More foreboding, another 252 banks joined the FDIC’s “problem list.” So far this year, 19 banks have failed.
  • The central bank of Ukraine banned the early redemption of term deposits, the most popular form of savings in the country. Bank deposits have dropped 20% since September, as bank customers dodge the risk of getting locked in.
  • The projected US$1.75 trillion federal budget deficit is almost four times the nation’s previous record-high budget deficit. The Times Square debt clock reads over $11 trillion. Japan’s now reads $7.8 trillion.
  • High unemployment has become a worldwide epidemic, with the infection spreading.
  • With world economies taking it on the chin, it’s little wonder that investor interest in gold as a safe haven is growing – a trend we expect to continue. And just wait until the dollar resumes its slide, the expanding money supply jolts the real economy, and inflation kicks in.

Given the ongoing turmoil and the swallowing darkness at the end of the crumbling economic tunnel, our recommended strategy here at BIG GOLD remains keeping one-third in cash, one-third in physical gold, and one- third in our selected gold stocks. New money for investment should be split among the same three categories; we just don’t see any safer places to be.

As economies around the world continue to shrink and governments continue administering larger doses of the wrong medicine, we’ll sit in relative comfort with our gold for protection and our stocks for profit. We expect the prices of both to rise as others join us.


Jeff Clark
for Markets and Money

Jeff Clark
Jeff Clark is the editor of BIG GOLD, a Casey Research publication that pinpoints the safest ways to capitalize on the gold bull market. The next issue includes an interview with Doug Casey; learn what made Doug such a spectacularly successful gold investor, and where he sees gold and gold stocks going in the near future.

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9 Comments on "What Happens to Gold When High Inflation, Excess Cash, and Falling Dollar Jolts Economy?"

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the average house price in detroit it NOT $7500 (i just googled it !)
it ten times that ie $78,000 actually
please look at this error!
at $7500 this is a good buy for a home! i rekon
thanks dude


why would the gov’ts of the world ever allow fiat currency to be redeemed for gold?! It would destroy the credit economies of the world and collapse gov’ts.. so that’s a silly argument.
A better argument is that when the value of fiat currency gets devalued by dilution everything (including gold) costs more.

Jon Bain

Renewable energy has to be worth more than gold. And energy itself as a form of currency means that the measure of wealth (watt) actually would have usable value. It can be generated, stored and used; and energy is still the major product which runs the world.


Hi, I’m a bit confused.. how do I “get into gold”?
Buy some actual gold from a mine?
Buy shares in a company mining gold (eg: Lihir) ?
Or can I buy just buy some gold on the stock market using a secret stock symbol, known only to the smart money people?
Thanks in advance.

Leadfree: Buy gold bullion from a supplier. Eg, Perth Mint. (don’t buy just ‘any’ gold, you don’t know its purity. Get 99.9% minimum, 99.99% preferred) Yes you can buy shares in a company, but that is different to buying gold. If we actually get hyperinflation, your shares will probably be worth much less than the gold you could have bought with the same money. You can buy into gold on the stock market using the ETF “GOLD”. Just look up the code “GOLD”. I have some, its okay. Only problem with ETF’s is that it is their word that you… Read more »

PS: If you do buy gold bullion (eg ounce bars), ensure they have certificates of authenticity/purity from a reputable source, eg Perth Mint.

Painted lead bars aren’t worth much.


how do you buy energy when the paper we use becomes worthless! its going to happen,do you buy energy with other energy, i don’t think so!gold runs the world its real (GOD MADE IT) AND MAN CAN’T MESS WITH IT LIKE PRINTING WORTHLESS PAPER! if you want to save your wealth buy gold and silver NOW!!!!!!!!!!!!!!! YOU MAY NOT HAVE A CHANCE LATER!

Biker Pete, Brighton, Ont., Canada
Biker Pete, Brighton, Ont., Canada

Yes, God made gold all right. He figured it served a very useful purpose neatly arranged in glistening stacks in locked vaults and storerooms, in case fiat currencies were ever threatened. But this is _not_ why the Chinese are interested in gold. They’re interested in it for theological reasons. I’ll never exchange my gold for WORTHLESS PRINTED PAPER. I’ll hump our ingots to the supermarkets, service stations and power companies and demand the change in non-fiat currencies like… like… uh… like…..


Hi Leadfree, I did both. I bought some shares in a goldmine, now I buy gold directly from them.

So far, so good.

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