Evaluating The “Rally”: How Long To Get To \$10,000/oz?

by Jeff Nielson, Sprott Money:

There’s a “rally” in the gold market right now, and (to a lesser extent) in silver. We’re told this by the mainstream media – in between its salvos of gold-bashing. Sadly, we have also seen this parroted by numerous Alternative Media commentators. So let’s examine this “rally” yet again.

The rally started almost precisely on the first day of the year (nothing suspicious about that). In the 8 ½ months since then, the price of gold has risen by roughly \$250, or a little below \$30/month. For convenience, let’s say that the price has been advancing by about \$1 per day.

For the sake of argument, let’s pretend that this is a real rally, and see how long it would take to reach any rational price targets. Let’s start with a big target: a fair and rational price for gold – today . A previous commentary pegged that fair price at \$10,000/oz, calculated in relation to a fair price for silver, today: \$1,000/oz. The 10:1 price ratio between the two metals (rather than the historic ratio of 15:1) is based upon the fact that most of the world’s silver stockpiles have been literally consumed, thus the supply ratiobetween gold and silver has not been this low in at least 500 years.

How long would it take the price of gold to get to \$10,000/oz, with the price advancing by \$1/day? With the price differential between the current price (\$1325/oz US) and the fair price for gold a little less than \$8,700, it would take a little less than 8,700 days for the market to reach that price level. The “rally” in the gold market would have to continue for roughly 25 years, just for the price of gold to reach a level which it should already be at – today.

Some readers will find this metric unconvincing. They have been deluged with mainstream media propaganda for so long that they cannot even conceive of a fair price for gold. So let’s move to a lower target.

Gold is a monetary metal . As such its price must precisely reflect changes in the monetary base. Between 2009 and 2014; the Federal Reserve quintupled the U.S. monetary base – the infamous Bernanke Helicopter Drop . At the time the Helicopter Drop began, the price of gold was at roughly \$800/oz. Thus if we ignore all of the other positive fundamentals of the gold market, and we pretend that the price of gold at the end of 2008 (\$800/oz) was a fair price, the price of gold had to rise to at least \$4,000/oz, by the end of 2014.

Of course the Federal Reserve’s conjuring of mountains of funny-money is only one of many positive fundamentals for the gold market. The price of \$800/oz at the end of 2008 was not a fair price. It was absurdly low, due to the serial price-manipulation of which all informed readers are very familiar. Thus a price for gold of \$4,000/oz – at the end of 2014 – would also have been absurdly low.

How long would it take for the price of gold to reach this low, 2014 price-target, at the pathetic pace of today’s Fake Rally ? We’re now dealing with a price differential of a little less than \$2,700, meaning a little less than 2,700 days to reach a somewhat fair price for gold – in 2014. Eight more years. It would take nearly eight more years of this pseudo-rally for the price of gold to reach an absurdly low price target, which it should have already hit, in 2014.

This would make the total length of this hypothetical rally a little over 8 ½ years, with the price advancing from a sub-\$1,100/oz price up to \$4,000 – a total move of roughly 370%. Now let’s compare this to the ten-year bull market from 2001 to 2011. During that period, the price of gold moved from roughly \$300/oz to nearly \$2,000/oz. That’s a move of approximately 670%, and this significant advance in price came despite the fact that the manipulation of the price of gold was, in some respects, more extreme during those years than what we see today.

Back then, Western central banks were still pounding the market with their official gold-dumping: 500 tonnes per year. But Western central banks have long since run out of gold to dump, and now central banks in other parts of the world having been buying gold – at a pace not seen in more than 30 years. The 500 tonnes per year of gold-dumping has nearly been reversed , a positive differential of nearly 1,000 tonnes per year in supply/demand fundamentals.