Three reasons $6,000 gold makes sense

If we look at gold from the perspective of an offensive buyer, their predictions of $6,000 gold start to make some sense. Here are three reasons why $6,000 gold just might come about.

Despite accusations that it’s a worthless chunk of metal, gold prices have risen for the past 12 years. That’s more than a decade of net buying, and those buyers must have a good reason to keep pushing up gold’s price.

In general, I break gold buyers into two camps: defensive buyers and offensive buyers. Defensive buyers are temporarily trying to protect their wealth from effects of inflation. Offensive buyers are the so-called “gold bugs” – the investors who believe that we’re in the midst of a financial crisis that can only be resolved in one way: a string of sovereign defaults. Those offensive buyers don’t plan on selling until we have some new, multi-national gold-backed monetary system.

If we look at gold from the perspective of an offensive buyer, their predictions of $6,000 gold start to make some sense. Here are three reasons why $6,000 gold just might come about:

1) A solid track record. $6,000 sounds like an awful lot of money, but that’s actually just 4 times higher than gold’s current price around $1,590 an ounce. During the 1970s, gold went up 24 times. If we look at gold’s starting point 12 years ago around $250 an ounce and multiply that by 24, we end up at $6,000 an ounce. Gold went up that radically in the past, so it can surely happen in the future.

2) The Dow/gold ratio. Historically, the Dow/gold ratio tends to revert to 2:1. At the time of this writing, the Dow Jones Industrial Average stands at 12,835 and gold’s selling for $1,591. That’s a Dow/gold ratio north of 8. If the Dow were to stay at its current levels (floundering sideways in the years to come), and the Dow/gold ratio were to return to historical means, we’d be looking at gold at $6,000 an ounce.

3) Sovereign defaults seem imminent. It’s hard to believe there are countries with debt that rivals our own, but Greece is under the magnifying glass. The Eurozone “is on a path that leads to eventual dismantling,” Peter Tchir of TF Market Advisors wrote in a note to clients on Monday (per IB Times), and Greece looks like it’s poised to be the first domino that falls. Sunday’s election in the country is still yet to yield a coalition government. That’s prompted warnings from the EU “that Greece would get no more payments from the $170 billion deal approved in March if it did not enact roughly $15 billion in cuts by June” (per USAToday).

If Greece stops getting bailout cash, the country would slide into default within weeks. That might not happen in June, but it seems imminent, and it would certainly raise doubts about the future of the Euro.

If people start doubting the future of a currency, gold will get a shot of adrenaline that’ll push it up rapidly. Throw a few currency defaults into the mix and there are few places besides gold to stash your cash. Viewed in that light, $6,000 gold seems more and more likely.

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Michael O’Higgins calls for gold at $6,000 an ounce

Famed money manager expects the Dow:gold ratio to revert back to 1:1, much like it did in January of 1980. If that happens, we could see gold at $6,000 an ounce.

About a decade ago, famed money manager Michael B. O’Higgins saw a chart in the “Letters to the Editor” section in Forbes that showed the historic ratio of the Dow to gold. He noticed the ratio stood at a remarkable 1:1 in January 1980. At the time Mr. O’Higgins was looking at the Forbes chart, the Dow:gold ratio stood at 44:1.

“It just hit me that Ben Bernanke was going around, he was threatening people that he was going to pull out all the stops to fight deflation and so on, so that’s when I started getting interested, and in January of 2002, I put 25 percent of my money in gold and gold-related stocks at around $280,” O’Higgins told Jim Puplava of Financial Sense in a recent interview.

O’Higgins made the bet when the gold-to-Dow ratio stood at 36:1. Today, the ratio’s around 8:1, but O’Higgins predicts the ratio will fall to 1:1 over the next few years.

“I still think at some point here, gold will trade even with the Dow,” he said on Financial Sense. “Now, today that would be $13,000. When I first bought gold at $280, people would say, ‘Well, where do you think it’s going to go?’ I said, ‘$1,000.’ It’s a chip shot because at that time, the Dow was 10,000, and 10:1 is the long-term average ratio of the Dow to gold. But, I said, ‘It’ll probably go to one-to-one, but at a lower Dow number.’

“(Today) people ask me, if you had to give a number, honestly, I have no idea what it’s going to do, and nobody else does, but I would guess 6,000 for both the Dow and gold at some point over the next few years.”

That could lead one to think that now’s the time to jump into gold, but O’Higgins actually thinks platinum could perform better. If gold hits $6,000 an ounce, O’Higgins says, that would imply $7,500 platinum. That’s why the money manager sold his gold holdings and shifted to platinum in September. It’ll be interesting to see if O’Higgins’ bet pans out.

O’Higgins is the author of two influential investing books: Beating The Dow (1991) and Beating The Dow With Bonds (1999).

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