Tuesday, October 25, 2011

Goldmoney's James Turk, $11000 Gold Price - Beacon Equity Research

By Dominique de Kevelioc de Bailleul
The result is in! At the end of the rainbow, the world will see a five-digit gold price, $11,000 per ounce as the 'fair value' of gold—for now—as the printing presses have yet to stop, in which case, more money printing translates to even a higher gold price down the road, according to Goldmoney President James Turk.
“Having filled the role of international money for 5,000 years, gold has been supplanted by fiat currency for the past 40 years because of government force,” Turk stated in an exclusive KWN report. “However, this nascent experiment with fiat currencies is not going well, as evidenced by growing global imbalances, unchecked increases in debt and financial derivatives, ongoing debasement of currency purchasing power and worsening monetary turmoil.”
So how does Turk assess a 'fair value' of $11,000 per ounce for gold, an asset which pays no dividends or interest?

Turk released his much-referenced 'Gold Money Index' calculation, a simple formula, really, in response to inquiries from his followers who'd like to follow his Index for estimating fair value of gold for themselves.

Turk demonstrates that by graphing the result of dividing total central bank foreign exchange reserves by total gold holdings of said central banks yields a trend line 'fair prices' versus the market prices for gold plotted over time.

Between the years 1971 and 1984, the correlation between the 'fair price' and actual market price appears uncannily close to 1.0, according to his graph. In other words, as central banks increased fiat foreign reserves, the market adjusted the gold price up to reflect the increased monetary level during that 16-year period.

For those who remember, back in the 1970s and for much of the early 1980s, the most watched statistic besides the BLS employment report and US Commerce Department's CPI and PPI, was the Fed's release of money supplies M1, M2 and M3, released each Thursday. Back then, everyone was tuned into the connection between money supply and gold.

Since 1984, however, Turk's chart shows the gold price in relation to money supply leveling off as sharply declining CPI numbers and interest rates set off the end of the 15-year bear market in stocks. The demand for stocks was greatly enhanced and encouraged by the passage of the tax code 401(k) in 1978 by Congress, which didn't go into effect until Jan. 1, 1980, further fueling stocks as most plans offered only stocks as a means for investing for retirement. Stocks were in, and gold was out of favor!

Early on, only eight million taxpayers utilized the tax-deferred law more commonly referred to as just 401k. But by 2005, more than 70 million participated in the government sanctioned plan as a way to defer taxes on earned income until after retirement, which ignited steady and voluminous amounts of cash into stocks—the gas tank, if you will, for the bull market in stocks. Few plans offered gold as an option throughout that time period, and may explain a good part of the divergence of retirement money going into stocks and away from gold on a relative basis during the stock bull market of 1984 through 1999.

As if on queue, the gold price took an additional beating from another method by which the spread between the price of gold and its fair value widened. UK's Chancellor of the Exchequer Gordon Brown's infamous sale of 60 percent of Britain's gold, unloaded at the very bottom of the market between the years 1999 and 2002, put additional pressure on the gold price for another three years. From its peak of approximately $850, set in Jan. 1980, the gold price reached a low of $255 in 1999.

But since the year 2002, the gold price has mirrored central bank holdings of foreign reserves, but the level at which the yellow metal started to mirror those reserves began at a much lower level than it otherwise would have, thanks to Brown's absolute bottom prices received for so much of UK gold reserves—a truly disastrous trade by the former superpower.

“Despite this remarkable rise in the gold price, it is clear from the above chart that gold’s undervaluation has barely budged for more than a decade,” Turk explained. “The reason of course is the growth in the quantity of national currencies held by central banks (the numerator in the Gold Money Index) is rising about the same rate as the weight of gold held by central banks (the denominator in the Gold Money Index). So gold remains tremendously undervalued.”

Turk's analysis dovetails quite nicely with another studied man of the markets, Swiss money manager Marc Faber of the Gloom Boom Doom Report
, who told NewsMax in mid-September that, though the gold price has risen to above $1,800 per ounce (at that time), it still remained grossly undervalued within the context of historical relationships with similar and other metrics used by Turk.
“In fact, I could make an analysis to show that the price of gold today is probably cheaper than when it was $300 per ounce based on the increase in government debt, based on the increase in monetary base in the United States and based on the expansion of wealth in Asia,” said Faber when ask of his opinion regarding the gold price.

Mr. Gold Jim Sinclair, 20-year veteran bond trader Paul Brodsky, Sprott Asset Mangement's Eric Sprott, prolific financial author Steven Leeb, and former Head of Princeton Economics Limited, Martin Armstrong, to name just several, all hold price targets of $10,000, or above, for the price of gold when the day that all fiat money finally squares itself with central bank reserve levels. Sounds preposterous?

Sinclair was laughed at by outsiders of the gold community in 1999 following his prediction of $1,650 for gold by 2010. Fewer pundits dare belittle him today for his $12,500 gold price forecast.

Especially after the gold price broke $1,000 per ounce in Mar. 2008, many pieces offering methods of value for an ounce of real money have littered the web, with all, save a few, calculating the long-term gold price to five-digits—at least! So far, Richard Russell won't budge from his call for $6,000 for the yellow metal. But more time is all the 50-year veteran of the markets may need to come around to the thinking of Turk and the gang.

A final note about the Goldmoney president, James Turk: it can safely be said that Turk is a cautious, conservative and measured communicator with with his wide audience. He neither gets too excited nor despondent during the volatile moves in the gold price.

Of all people, if James Turk can demonstrate a $11,000 value to gold and confidently make the call, that estimate could turn out to be a bare minimum appraisal. But from time to time, he'll be out with another adjustment to his target price as he's done on several occasion already during this bull market.