Gold Could Reach $20,000
By Tom Dyson
amount of liquid savings I keep in gold would make the average
In fact, on the occasions when I have told people how much of my money
is in gold, they think I'm nuts. Gold represents more than 50% of my
When folks hear that, they think I'm making a crazy speculation on the
price of gold. Or they think I'm an eccentric.
I tell them gold is the safest place to keep your money. It's the
modern equivalent of putting cash under the mattress. Gold is such a
conservative investment, it doesn't even pay an interest rate.
Here is why I like gold:
To stave off the housing and credit crisis, politicians have increased
the amount of paper (and electronic) money in our financial system. If
you double the number of dollars in the system, then the market should
make you pay double the number of dollars for an ounce of gold. If you
increase the quantity of paper money by a factor of 20, the gold price
should also rise by a factor of 20.
This is simple mathematics. It's the same calculation for tailored
suits... loaves of bread... or rare seashells. Double the quantity of
money, double the prices.
Weber, the editor of the excellent Weber
Global Opportunities Report, makes the calculation in the
most recent issue of his newsletter. He adds up the value of all the
paper money in the world... and comes up with $100 trillion. Then he
divides this by the total amount of "above ground" gold in
existence – 5 billion ounces – and finds a fair value of gold at
$20,000 an ounce.
value of paper money
fair value of gold
Chris Weber's calculations are correct, the gold price would need to
rise about 22 times to match the rise in the quantity of paper money
in the system.
For gold to get that high, people would have to lose confidence in
paper money. I think this will happen eventually... just not anytime
soon. And of course, this calculation is theoretical. I'm not
predicting $20,000 gold. The
point here is lots of paper dollars are floating around, but only so
Normally, gold is an expensive investment to own. That's because it
doesn't pay interest. And you have to pay a small cost to maintain a
safety deposit box. So you lose a few percent a year in opportunity
cost when you put money in gold instead of in a savings account.
But right now, that penalty doesn't exist. My bank
pays 1% interest in its savings accounts. Ten-year U.S. Treasury bonds
pay 4% interest. The government says inflation is running at 4% a
year. I think it's higher... around 5%-7% per year. Real
interest rates are negative... You're losing money in your savings
You can see this "penalty on savers" in the chart below,
which shows real interest rates over the past 12 years:
why I keep my savings in gold. It's a safe investment with huge
upside. And right now, I pay no interest penalty for making this bet.
Other people are starting to figure this out. That's why gold has
risen from $250 an ounce to $900 an ounce over the last six years.
I don't see our growing inflation disappearing anytime soon... and I
see commodity prices in a long-term uptrend. That's why I'm
comfortable with such a large gold position... and why gold's bull
market still has a long way to go.