In spite of the fact that gold has rallied from a price of $1,140 last November, my long-term empirical model suggests it is still undervalued and has the potential to rally to $2,000 by late 2015 or 2016 and quite possibly even to somewhere between $5,000 and $10,000 in six years time. This article explains why that is the case.
By Gary Christenson (deviantinvestor.com). Originally published* under the title Gold Price Model Says Gold Still Undervalued.
Examine the graph of annual gold prices since 1971 versus the calculated gold prices from the empirical model. The correlation, as calculated by Excel, is 0.98 for 1971 – 2014.
My empirical model begins in 1971 when President Nixon “temporarily closed the gold window,” allowed the dollar to float freely, and enabled currency in circulation to increase rapidly. The model uses only three macro-economic variables, which are discussed in detail in my book, “Gold Value and Gold Prices From 1971 – 2021” [see here].
What does the model indicate for the next several years?
Since the model is based on two dominant variables and one minor variable we can ask how those two dominant variables are likely to change in the future.
- National debt which has increased since 1913 at about 9% per year. Since 2008 it has risen approximately 10.0% per year. Based on one hundred years of history and current politics, we can safely assume that the U.S. national debt will continue rising, and that expenses for the United States government will substantially exceed revenues for the foreseeable future.
- The price of crude oil which has fallen dramatically in the last 5 months. While many people have suggested that the price of crude will remain low for the balance of the decade, and perhaps far longer because of weakening demand, I believe that the price of crude will erratically rise along with total currency in circulation and total debt, as it has since 1971.
...[In addition to what the above chart suggests for the price of gold by late 2015 or 2016] and, based on the above plausible assumptions about increasing debt and the price of crude oil over the next six years, my model indicates that $5,000 gold, and possibly $10,000 gold, are reasonable expectations by 2021 as discussed in detail in my book, “Gold Value and Gold Prices From 1971 – 2021”.
If central banks fail in their efforts to increase inflation, and the world devolves into a global deflationary depression and possibly a nuclear winter, the dollar price of gold could be unpredictable, but the purchasing power of gold will almost certainly increase as paper assets and fiat currencies crash and burn in a deflationary depression.
In my opinion the deflationary depression scenario seems far less likely given that central banks have a one hundred year history demonstrating both their willingness and ability to devalue their currencies, create inflation, and to drastically increase the total debt and currency in circulation.
The price of gold closed on Friday, January 16 at approximately $1,276. My model indicates that the price is still too low by about 16% and therefore the probability is that the price of gold will rally substantially [short-term to $1,480 and considerably higher in the ensuing] years.
[The above article is presented by Lorimer Wilson, editor of www.munKNEE.com and www.FinancialArticleSummariesToday.com and the FREE Market Intelligence Report newsletter (sample here – register here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. This paragraph must be included in any article re-posting to avoid copyright infringement.]
*Original Source: http://deviantinvestor.com/6667/gold-price-model-says-gold-still-undervalued/
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