 Just How High Can Gold & Silver Go?
Todd Stein & Steven McIntyre
The Texas Hedge Report
March 17, 2006
Courtesy of www.texashedge.com
Phase I of the bull market
in precious metals has drawn to a close. No longer do people
look at you funny if you suggest that gold and silver may outperform
equities over the near term. The fact that the price of each
metal has more than doubled over the last five years has gotten
some people's attention. Throughout the entire duration of phase
I, physical bullion and high quality mining equities were accumulated
by a combination of hard money advocates, sophisticated institutions
and forward thinking individuals.
Today, we believe the bull
market in precious metals is moving into a second phase, similar
to how stocks started to regain the public's confidence in the
mid 1980s all the way through the mid 1990s. A so-called "wall
of worry" remains to be climbed as phase II is sure to include
several scary pullbacks over the coming years. Expect to see
mainstream institutions and wealthy individuals enter the market,
while the average mom and pop investor hold out faith that tech
stocks and real estate will come back to the forefront.
Only when the general public
starts to get in on the action will we be in the final leg of
the precious metals bull market. Rather than giving you a price
target, you will be able to identify this final "blow-off"
phase when the price increases begin to approach those of internet
stocks in the late 1990s. Moreover, there may be several cultural
symptoms of a bubble in precious metals including coverage in
mainstream television and radio shows, primetime dramas, and
maybe even a movie about the riches to be had in gold and silver
exploration. Anyone remember the short-lived television shows
called The Street and Bull which went into production
while the NASDAQ was topping? Turn on any AM radio station on
a weekend these days, and you are bound to find multiple shows
about mortgages or real estate - another sign of a topping process.
So the question we are always
asked is, "Just how high do you think gold and silver will
go?" The short answer is that we have no idea, but we thought
it would be interesting to map out our thought process below.
Let's first take a look at the average annual prices of gold
and silver over the last 45 years.
The graphs above begin in the
1960s because we wanted to remind readers that the dollar prices
of gold and silver were somewhat fixed for a large portion of
the decade. Anytime a foreign government wanted to redeem its
dollars for gold, they were able to do so for about $35/oz.
As LBJ turned on the printing presses to finance "guns and
butter", foreign governments became skeptical about the
long-term viability of the fixed Dollar-Gold price. Time
Magazine, in its February 12, 1965 issue, said, "Perhaps
never before had a chief of state launched such an open assault
on the monetary power of a friendly nation. Nor had anyone of
such stature made so sweeping a criticism of the international
monetary system since its founding in 1944. There was Charles
de Gaulle last week proclaiming that the primacy of the Dollar
in international dealings was finished, calling for an eventual
return to the gold standard - which the world's nations scrapped
50 years ago - and practically inviting other countries to follow
France's lead and cash in their dollars for gold."
Nixon eventually closed the
gold window and the rest is history. In 1970, the average price
of gold was $36.00/oz. About a decade later, gold would break
past the $800.00/oz level. So some might say that since gold
recently bottomed in the $270-360 range, and equal percentage
increase would cause the price to rise to at least $8,000.00/oz.
This would mean a ten-fold increase from its all-time high.
Using the same ten-fold increase for silver, you come up with
$500/oz. Frankly, we think this ultra-bullish "equal percentage
increase" method is silly and should be ignored. $800/oz
and $50/oz prices for gold and silver occurred at the very top
of a mania, just like when the NASDAQ hit 5000 six years ago.
Using the charts we have provided
shows the average annual price rather than the daily price of
each metal. If you take out the year 1980, the highest average
gold price was $460. Today the price of gold is $100 higher
which means that we are in pretty lofty territory on a historical
basis. Silver is similar too as it has only spent a couple of
years averaging more than $10/oz. So the bottom line is that,
on a historical basis, gold and silver are at pretty high levels.
Of course, there is the huge caveat that the prices used in
our analysis are nominal, and therefore one would need to rerun
the charts in 2006 dollars to get a more accurate picture.
An analyst can waste lots of
time using historical price charts trying to justify a particular
price target for gold or silver. Similarly, an inexperienced
investor can lose quite a bit of sleep trying to figure out the
future direction of various price charts. Your authors have
the distinct advantage of living in Texas, where the pace of
life is slower, the people are friendlier, and the volatile energy
markets make the daily moves in gold and silver look tame in
comparison. All you need to do is sit back and think about the
gargantuan liabilities this country faces in the forms of Social
Security, Medicare and the overall national debt. Throw in the
unsustainable trade deficit and it should be obvious that eventually
our currency will lose quite a bit of its value in terms of real
money - which is of course gold and silver. It may not be tomorrow,
it may not be this decade, but one day, the U.S. Dollar will
end up in the same place as the German Reichsmark, the French
Livre and the Roman Denarius.
March 17, 2006
Todd Stein & Steven McIntyre
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Texas Hedge Report
Todd Stein
& Steven McIntyre
email: admin@texashedge.com
For more information, go to http://www.texashedge.com.
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