Despite volatility and a retracement in the nominal dollar price, my forecast for the gold price in the intermediate term has not changed. In the end, gold will reach a price of $10,000 per ounce. Either central banks will be successful in inflating prices or they will fail and ultimately resort to gold as an inflation numéraire of last resort, as FDR did in 1933. In either case, central banks will eventually achieve the inflation they require to sustain debt levels. Former Fed governor Rick Mishkin referred to this condition as "fiscal dominance."
In a world of inflation and fiscal dominance, where central banks rely on gold to either cause inflation or restore confidence after it has gotten out of hand, a new gold standard or at least a gold-linked currency system may be necessary.
Simple is the implied price analysis. It is the global ratio of official physical gold to paper money. Except for China's off-the-books hoard, both the official gold hoards and the official money supply figures are known.
A few presumptions are required. For instance, which nations will be part of a new gold standard? What is the correct definition of the money supply, such as M0, M1, M2, and so on? To maintain confidence in a new gold-linked system, what ratio of gold to money will be required, such as 20%, 40%, etc.? The math is simply provided that the data are gathered and these assumptions are made. A $10,000 indicative nondeflationary price is based on the assumption that China, the Eurozone, and the United States will all participate, and that M1 with a backing of 40% gold will be the appropriate money and gold measure. If one uses the M2 money supply with 100% gold backing, one can expect results as high as $50,000 per ounce from other assumptions. We aren't there yet—it could be years before we get there—but that's where I see it going. Nonetheless, it can be quite arduous.
In the interim, gold investors should adhere to a few straightforward guidelines. Because gold is volatile when measured in dollars, I advise against investing in gold with leverage. Leverage will amplify the underlying volatility whenever you enter the futures or options market, use margin, or borrow money.
Gold already exhibits enough volatility to warrant additional volatility.
Second, for most investors, I've always suggested allocating 10 percent of your investable assets, or 15 to 20 percent if you're a little bit more aggressive.I have never advised you to sell your entire portfolio and purchase gold, and I will not do so now. I do not advocate investing entirely in one asset class.
In comparison, institutional allocations to gold only amount to about 1.5% worldwide. That is still more than three times what institutions actually have in gold, even if you cut my conservative recommendation of 10% down to 5%.
The liquid portion of your portfolio—your investible assets—is intended to receive the 10% allocation. Your primary residence and any equity in your business should not be included in the pool of investable assets. You might be a pizza parlor, dry cleaner, restaurant, car dealer, doctor, or dentist.
The "investible asset" pool should not contain any capital tied to your way of life. Home equity is subject to the same rule. Your investable assets are anything that remains after the separation of your home and business. I suggest investing 10% of that amount in gold.
You will only have lost 2% of your portfolio if 10% of it is invested in gold and the price falls 20%. That is not a complete loss. Nonetheless, if it goes up by 500 percent, as I anticipate, you will do quite well with that 10% allocation. That is a portfolio gain of 50% from a single investment. Due to the disparity between the potential benefits and drawbacks, I support a 10 percent allocation. You are prepared to weather the storm if you follow these straightforward guidelines: buy physical gold, avoid leverage, and limit your allocation to 10%.
Staying focused on the long term and not getting caught up in the day-to-day fluctuations in gold's dollar price is another important piece of advice.
It already appears to be volatile. More importantly, the asset under threat is not gold but the dollar itself. Once confidence in the dollar itself is gone, it won't matter whether the dollar price of gold went "up" or "down" on a particular day. At that point, people won't care about dollars; all they'll want is actual gold.