What is the maximum possible price for gold?

OK, so you missed the run up so far in gold.  Yes, I know you did because most of my family and friends are in the same boat despite the fact that I have been bullish (and vocal) on gold for years.  Perhaps 5% of all the people I know own any form of investment gold and of those 99% of them bought it only after they heard me explain the big con.  It's pretty hard to have a real bubble when so few are actually participating.

And so there you sit wondering what to do.   You know damned well that something is wrong - very wrong.  Gas and food prices are skyrocketing and you are doing the math on your 401k and IRA.  You know the purchasing power of these savings accounts are plummeting in a relative way even if their dollar value has been climbing since the first wave of the crash ended in March 2009.  Since then you have also developed an inner sense, an inner voice which is telling you that this strange, centrally managed thing that we laughably call a free market capitalistic economy is beyond anyone's experience.  You smell the risk and you know that many others do as well.  You know that buying gold a long time ago would have been a good move.  Your hindsight is working perfectly but the forward looking vision is still just as cloudy if not more so than it was when gold was sub $1000.

So maybe I can help you if you can just suspend disbelief long enough to listen to a complete stranger and recognize that you are operating in herd-think mode.  Instead of thinking independently (which would give you that forward looking vision you so badly desire), you keep reacting to what others are doing.  Don't get me wrong, I'm not knocking herd-think. This is how fish schools move in unison and how flocks of birds turn on a dime.  Looking left and right and compensating based on what others are doing is how the Blue Angels precision flying team stay in synch with each other during complex aerobatics.  Unfortunately, it is also, at times, why they tend to plummet straight into the ground in a fiery ball.  It's also how a pack of perfectly healthy lemmings occasionally runs right off the edge of a cliff.  Instead of thinking independently they just react to the clues they perceive around them.  They stay in formation.  Sometimes herd think is a good, workable strategy but if you are near a danger point - flying close to the ground at supersonic speed or running in unison near the edge of an abyss - independent thinking can be a life saver.

When you operate in independent mode, your main focus is getting ahead.  Conversely, when you operate in herd mode, your only concern is to not be left behind.  Surrounded by others in the herd that are doing and thinking the same way as you do makes you feel more secure.  It causes the serotonin to flow.   Of course the other side of being focused on not getting left behind is not worrying about getting ahead.  The Eagles rock band said it pretty clearly in their song, "After The Thrill Is Gone": "...you don't care about winning but you don't want to lose...".

Getting ahead puts you out there, alone.  The rest of the herd glares at you for it and they resent you.  You are a threat to their well being and their all important serotonin drip.  To them, if you are not part of the herd then you are a threat to it.  In reality, the only threat that an independent thinker presents to the herd is that he/she will get ahead, thus triggering the fear in everyone else that they are getting left behind.  Herding 101 says don't get left behind.  In order to avoid that you can leave the herd and compete with the leaders (thus separating yourself from the collective) or you can stay in the herd and attack the leaders from the safety of the masses.  Sound familiar?

So here you are in herd mode watching the gold holders step ahead.  Your stock portfolio is flat to down over the past decade while food and energy prices have risen.  You are clearly going backwards.  During that period, gold holders have moved forward big time and there is a growing chance they will never have to pay any taxes on their fake, inflation driven capital gains.  Think that's impossible?  Think again.  The rules have always been kiltered in favor of the smart money and several states are already working to make this law.  Once the states make it law then the federal government is going to be hard pressed to collect capital gains on a metal that has not appreciated in real value but rather only in terms of a plummeting dollar.  Count on it.  Stocks held by the masses will probably go in the other direction - taxes will be higher than expected down the road.

So despite all this background you are saying, "But gold is more than $1500/oz, how can I buy it here?".  "If I buy gold now then it could pull back and I don't want to lose."  Again, herd think 101.  The final part of the calculus is "If I buy gold here then how high could it go.  Aren't we near a ceiling right now?"

And so I finally get to the point of this blog entry which is what is the maximum possible price for gold.  In order to address that, let's discuss what the maximum possible price is for food and energy.  With respect to these things we always have to remember that buyers set the market price of things, not sellers.  This is because no seller can demand that anyone buy something from them (unless you are big government and you have some health care program you want to ram down everyone's throat using threats of fines on those who do not want to participate).  The bottom line is that people only have so much money.  As food and energy prices go up people of limited means (i.e. most of us) have to cut back.  They don't want to eat less and they don't want to set the thermostat to 82 degrees in the Texas summer but they just can't afford to pay more and so they cut back.  As the old saying goes, the best remedy for high prices is high prices.  When people have to cut back then prices have to come down.  High prices relative to stagnant salaries destroy demand.

Gold is not immune from the rule of supply and price based demand but there is a significant difference between gold and food or energy.  Food and energy are consumption items.  You acquire them because you require them.  Conversely, gold is not a consumption item.  You acquire it because you have excess wealth that you want to store somehow.  If gasoline goes to $10 or $20 a gallon in America due to Bernanke's mismanagement of the money supply coupled with profligate spending by government con men then many people simply will not be able to afford that.  Unfortunately, they need the fuel to get to work, run their tractors on their farms, heat their homes in winter, etc.  High priced food would have a similar effect.  If the people sense that they are being starved to death and that they have nothing to lose by rioting then we will have riots and government hacks will be at great risk of being hanged in the streets.

But what if gold went to 5, 10, even 15 thousand dollars per ounce?  Would this, in and of itself, be the cause of riots or unrest?  Of course not!  Why?  Because people do not need gold to live day to day.  It is a savings tool.  If you don't have excess wealth to save then you might not like it but you probably won't don the "V for Vendetta" mask and start building firebombs in your basement either.  The price of gold is therefore limited only by the amount of money that people have to buy it.  Importantly, it is not limited by the threat of social disorder if prices get too high as would happen if food or energy went up 10x from here. 

As you consider this, keep in mind that there is a bunch of credit based money floating around out there - the so called "hot money" that is constantly moving from market to market looking for a place to be stored.  We are talking about sums that reach into the many tens of trillions of dollars at a time when the monetary base is "only" $2.5 trillion (roughly the amount that Rumsfeld said went missing from Pentagon budgets 1 day before the 911 attacks).  All of this credit based money was conjured from thin air by bankers and other "special" financial institutions.  This credit based money is always very afraid of the very real threat of evaporating back into the Ether from whence it came.  Thus, it is always on the hunt for not only safe shelter but also on a fair rate of return. 

As one market gets over valued the hot money flees to the next market.  In other words, there is too much credit based money out there relative to the places where it can be reasonably invested with low risk.  Hot money overheats any market that it touches.  At some point the rate of return part won't matter so much (US treasuries, anyone?) to hot money holders.  Safety of not being defaulted upon and thus evaporating will become of paramount importance.  As the safety of US treasuries is increasingly called into question, the demand for something solid and physical and non-vaporous like gold is likely to increase. 

So to answer the original question, there is no social limit on how high the price of gold can run (a statement which cannot be made about food and energy).  The only limit on the price of gold is how much excess money (of the monetary base or of the credit variety) the world has in hand that need to be stored someplace.  Given that less than 0.6 percent of the global assets are currently stored in gold it would seem that there is still quite a lot of room for gold to run before the global economic scam collapses and is forced to reach a new equilibrium.  Gold used to trade at $35/ounce back in 1971.  Now it is $1500+ per oz.  People back in 1971 would have claimed you were insane had you predicted that gold would be $1500 in 2011.  They would have attacked you for existing outside of the herd.  They would have been angry at you for pinching off their serotonin flow.

Going forward, there is no reason that gold cannot trade at $5k, $10k or $15k per oz. 5, 10, or 15 years in the future respectively.  So to close this post out, I continue to see physical gold as the best long term store of wealth for your retirement.  Buy it on a regular basis no matter the price.  Sometimes you will buy at a short term peak and sometimes at a short term trough.  Know this in advance - EXPECT TURBULENCE - and get over it quickly when it happens.  The only way you can get hurt is if you go "all in" at once during a peak and then panic sell when the inevitable dip comes OR if you buy gold on leverage OR if you buy fake gold (paper gold) via market ETFs which could turn out to be fraudulent OR if you let someone else have physical posession of your gold.  In other words, if you are a conservative, buy-over-time (AKA dollar cost averaging) person who demands physical posession of the gold then you will be immune to 99% of all the actual risk out there (nothing is 100% risk free).  If you are a leveraged or paper gold gambler then you are at significant risk.

Physical gold is the perfect long term retirement wealth storage medium.  With gold you might never get rich but you will always have what you worked for despite the best attempts to steal it from you by Bernanke and the con men.