Monday, January 20, 2014

Gold Should be at $1,900

click to enlarge

Last December I pointed out that gold has until 2011 been for 30 years highly correlated with the US money supply. If gold still followed that traditional correlation, gold should be trading around $1,900.

Its in 2011 that what had been a .84 positive correlation turned to a negative .34 correlation. To me this is a sure sign of central bank intervention.

The graph above and the text that follows is from Phoenix Capital.

Many analysts believe that the precious metal is DEAD due to its having fallen from a record high of $1900 per ounce to roughly $1200 per ounce today (a 36% drop).

However, this price movement, while dramatic, is quite inline with how commodities trade. Gold has already posted one drop of 28% (in 2008) during its bull market, before more than doubling in price. This latest drop is not much larger.

Moreover, a 36% drop in prices is nothing in comparison to what happened during that last great bull market in Gold back in the 1970s. At that time, Gold staged a collapse of nearly 50%. But after this collapse, it began its next leg up, exploding 750% higher from August ’76 to January 1980.

With that in mind, I believe the next leg up in Gold could very well be the BIG one. Indeed, based on the US Federal Reserve’s money printing alone Gold should be at $1800 per ounce today.

Since the Crash hit in 2008, the price of Gold has been very closely correlated to the Fed’s balance sheet expansion. Put another way, the more money the Fed printed, the higher the price of Gold went.

Gold did become overextended relative to the Fed’s balance sheet in 2011 when it entered a bubble with Silver.  However, with the Fed now printing some $85 billion per month, the precious metal is now significantly undervalued relative to the Fed’s balance sheet.

Indeed, for Gold to even realign based on the Fed’s actions, it would need to be north of $1,800. That’s a full 30% higher than where it trades today.

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