The New Case for $5,000 Gold

08/08/2011 11:30 am EST

Focus: COMMODITIES

Curtis Hesler

Editor, Professional Timing Service

Run a few numbers and the case for gold’s continued move up isn’t just wishful thinking on the part of gold bugs, writes Curtis Hesler of Professional Timing Service.

First of all, no matter what Bernanke and associates want you to think, gold is money. The powers that be don’t like that thought, of course, because it ruins their little banking debt-slavery scheme.

You can buy stuff with gold. In fact, last May, Utah became the first state to pass legislation making gold and silver coins legal tender. They also have exempted the sale of coins from state capital gains taxes.

A depositor system is being established so investors can store their gold and silver and use depository receipts in financial transactions. Other states are currently considering such legislation.

There is talk that Zimbabwe is working toward revitalizing its currency by introducing a gold standard. Malaysia has suggested using gold in transactions with other Muslim countries using an Islamic gold dinar.

There is also a movement in Mexico to monetize the silver Libertad. Currently, the coins have no monetary value embossed on them, which makes them clumsy for day-to-day transactions.

However, there is an initiative that should pass with ease that will allow the Mexican bank to quote a price for the coins that cannot be depreciated.

The problem with these hard-money approaches is that due to Gresham’s Law, you are not going to see gold and silver coinage in circulation any time soon.

The headwind here is that if you have a pocketful of depreciating US bank notes and another pocketful of gold and silver coins, which pocket are you going to reach into when buying something? Bad money is spent before good money if there is a choice.

Nevertheless, you may in the future be able to spend out of either pocket. I am considering selling this newsletter for $6 a year, given payment is in pre-1965 silver coins.

Some brokerage firms are beginning to accept gold on deposit from customers, against which financial assets can be purchased. Gresham’s Law aside, gold is gradually being monetized, and it may not be long until you will think in terms of what something costs in gold rather than the price of gold in dollars.

In the meantime, remember that although the gold price fluctuates, gold has never become worthless. Gold cannot default.

Furthermore, gold appreciates in any unstable economic environment, either deflationary or inflationary. Only in stable environments, or when the rate of inflation is declining, does gold fail to do well. I don’t think we have to worry about that for a while.

There has been talk at each new high that the gold rally is in a “bubble.” A good place to start with that is smoothing out the arithmetic price comparison with a log chart. You should definitely read this article at Profitimes.com.

If you look at this gold bull on a percentage-increase basis, it does not look like a bubble. The blowoff or velocity phase will come…but currently, the gold market is a normal bull move that is far from over.

NEXT: A Stunning Correlation

|pagebreak|

Compare the rally in gold from November 1975 to April 1979 with the current bull market. (Keep in mind that in the bull of the 1970s, the bubble phase came after April 1979.) The interesting element brought out in the Profitimes article is that the two periods correlate at 97.83%.

That is an eye opener. So, bottom line, where does gold end up if this correlation runs full course? Well…$5,000.

I am not sure that it is a good idea to tie your sights too closely on any long-term call for the ultimate high in gold, but the above exercise is interesting, to say the least.

I am quite certain we will see gold break $2,000, but the best way to handle this is to monitor the Dow/gold ratio (currently under 7) and take your cue from the market itself. The ratio will tell us when it is time to shift out of gold and silver, but we have some very exciting times ahead before that happens.

As gold continues higher over the longer term, the ratio will eventually fall under 5, and ultimately to 2.

So, what to do now? Hopefully, you were able to use weakness during April, May, and June to accumulate positions.

If not, or if you feel underinvested in precious metals, August is typically a soft month for gold prices. With gold and silver as overbought as they are, it should not be surprising if they cool off a bit this month.

As for gold, our technical work is asking for caution, with major support at $1,500 and minor support at $1,550.

I have pointed out that there are a lot of big, serious buyers lurking out there. China, Russia, and India are but a few of the biggest hitters.

Russia, interestingly enough, is now a net importer of gold, and is also one of the world’s largest producers. Think about that. I wouldn’t get overly bearish on bullion.

Subscribe to Professional Timing Service here…

Related Reading:

Related Articles on COMMODITIES