Below are 3 popular metrics used for predicting the price of gold. We examine how high the gold price could rise according to each metric.
The price of a man's suitEver since Biblical times, the price of a high quality man's suit has cost about 1 ounce of gold. At Amazon the most expensive man's suit is $3,999. |
The Gold Dow ratioThe Dow/Gold ratio is the number of ounces of gold needed to buy the Dow Jones index. The long term trend of the ratio is up at a rate of 1.25% per year. It would be logical to expect therefore the ratio to return to a value of around 5.5. The Dow is currently 12331, so gold might reach $2,242 an ounce. |
Inflation adjusted priceOn 21st Jan 1980 gold reached $850 an ounce. Inflation adjusted this is $2,252. The average price for 1980 was $612 which is $1,621 adjusted for inflation. |
Each of these independent metrics is pointing to a gold price of around $2,000 an ounce, so we would expect the price to continuing rising for a while longer before the current bull market ends.
The average forecast given by the London Bullion Market for 2012 is $1,766.Some experts are predicting the return of the gold standard. Under a gold standard dollars ought to be covered by gold which would mean the price of gold would have to go much higher. To calculate how high this would be you take the monetary base and divide it by the government's gold reserves. The monetary base is currently $2.645 trillion and gold reserves are 8133.5 tonnes or 261.527 million troy ounces. 2,645,000,000,000/261,527,000.00 = $10,113/ounce. (This was how the price of gold was calculated at the time of the Bretton Woods agreement). The price could go ever higher. In 1980 the money supply amounted to a “mere” $133.425 billion. A full gold backing would have required a gold price of some $500. However, gold shot up to $850. A comparable overshoot would give a gold price of $17000/ounce today.