The Case for $25,000 Gold

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Gold is trading off a bit from its recent high of $1,800 per ounce. This does not surprise me. Whenever a stock or commodity picks up strong momentum, short-term traders jump in for the ride. These short-term traders hold no fundamental understanding of why a commodity or stock is going up, they are just along for the price action. Since they have no fundamental underpinning for their purchase, when there is some short-term downward pressure, they sell because of that downward pressure. Indeed, in the EPJ Daily Alert I have warned that a $500 per ounce drop in the price of gold could occur. It could occur now, or when gold hits $2,500 per ounce. But this selling will have no relevance to the long-term price of gold,which likely will be much higher.

Here is my case for a much higher gold price.

It has often been said that gold climbs with the price level that 100 years ago you could buy a very nice suit for an ounce of gold and that you can do the same today. That was true, but I think things are about to change. Over the last roughly 50 years, gold has been accumulated by gold bugs. As prices climbed, gold bugs saw their incomes climb as well and thus they had more money to spend on gold. Thus, the price of gold climbed roughly in line with the price level. This is now changing.

The gold bugs are still in the game, but they have company. Central banks have become net buyers of gold, as have many others. The crises in Europe has caused many overseas to seek gold out. And in the United States, the possibility for many new gold buyers emerging is very strong.

During the inflation of the 1970′s, gold climbed in price, but this only really started after President Ford made gold once again legal to own in the United States. It took much of the 1970′s for people to realize that gold was an important inflation hedge. But now after we have that lesson under our belt and the recent decade long climb in gold from roughly $250 per ounce to $1,800 per ounce, most in America understand that gold is a very important inflation hedge.

Yet the number of Americans who actually own gold is likely under 10%. The question must be asked, "What happens if price inflation really accelerates at some point, as it is likely to do?" The answer most likely is that many more will flock to gold.

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2011 Economic Policy Journal

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