Could gold hit £10,000 in the long run?

As I started writing today’s Money Morning, gold was plummeting. It had slide by $22 even before New York had opened. It’s now trading at around $1,708 an ounce.

This correction was predictable. (The proof of that is that I predicted it.) I don’t think it’s anything serious, just a normal pullback – normal for the time of year and normal given the up-move gold had over the summer.

I see support, as I said last week, in the mid-to-high $1,600s. Worst case, it may go back to the low for the year at $1,520. I doubt it, though.

That said, in such periods, a little morale boost can be handy. So today I’m going to take a look at some gold chart erotica…

How much gold does it take to buy the FTSE 100?

First, we compare the price of gold to the FTSE 100 – how many ounces of gold it takes to buy the FTSE. The FTSE currently stands at 5,800. An ounce of gold is about £1,080. So it takes just under 5.5 ounces to buy the FTSE.

In the summer of 1999, shortly before Gordon Brown decided to sell, with the FTSE some 10% higher at around 6,500 and gold around £160 an ounce – yes, £160 – it took around 40 ounces of gold to buy the FTSE. The FTSE has fallen by some 85% against gold since then. Here is the chart showing that ratio since 1935.

Gold ratio versus UK stock market 1935 to present

(These charts come courtesy of Thomas Paterson and Gold Made Simple for whom Thomas is chief economist. I recommend his work.)

Fans of long-term cycles – Kondratieff winters and the like – will detect a clear business cycle here. Periods of growth and expansion – the 1950s and ‘60s, the 1980s and ‘90s – followed by periods of contraction – the 1970s and ‘00s.

Such a cycle is not apparent when you look at long-term stock markets measured in government currencies, such as the pound or the dollar. These currencies are routinely debased and so the declines are get hidden by the loss of the currency’s purchasing power. Constancy is one reason I think gold makes a much better unit of account than government money.

It’s interesting that Brown sold our gold shortly after he made that delusional declaration, “no more boom and bust”. An 85% fall is very much the stuff of busts.

Betting that a market which has already fallen by 85% will fall further may not seem a great idea, even if that is the direction of the trend. So should you be rolling out of gold and into stocks?

I don’t have strong views on the equity markets just now. I’m not especially bearish or bullish, just nervous. But the fundamentals for gold are so much better than the fundamentals for stocks, that I can’t help thinking gold is still the place to be. Some kind of monetary crisis seems inevitable, and in such a situation, you want to own gold.

Yes, huge gains have been made by those who rolled out of equities and into gold in 1999. But that’s not to say that further huge gains can’t still be made. For example, what if the gold price were to return to the relative extremes of the 1970s, when its ratio to the FTSE was as low as three, two or even – on one day in January 1980 – 1.2?

If the FTSE stayed flat and the ratio went to two – in other words, it took two ounces of gold to buy the FTSE at today’s level – then the gold price would be £2,900. That’s a near triple on today’s price of £1,080. If it went to 1.2, the gold price would have to be around £4,800, a near-450% gain.

What the Bank of England’s gold holdings say about the gold price

Here are some other interesting statistics to ponder: the Bank of England’s balance sheet, and its gold holdings.

Here’s why I think that some kind of monetary crisis is inevitable. As Patterson notes: “Since the Bank of England started buying up UK debt at the beginning of 2009 the UK has issued about £724bn in new debt. Over that time period the BoE has bought up £365bn. Which means that a staggering 50% of ALL newly issued UK debt has been covered by the BoE.”

At 50%, the BoE has almost become the market for gilts. I can’t see how such artificial intervention can end well for sterling. The BoE is creating an artificial market – a bubble in other words – in government debt. This ability to borrow at artificially low levels means that governments are not being forced to cut spending in the way that they should.

Here’s the BoE balance sheet since 1830, again courtesy of Patterson.

Bank of England balance sheet since 1830

Note the acceleration of the late 1960s and ‘70s. Then the even greater acceleration since 2008, which we see below with the BoE’s balance sheet since 2006. The £400bn threshold has been crossed.

Bank of England balance sheet

The consequences of expanding the balance sheet in that way will be hard to control. I do hope there are contingency plans in place beyond just reacting to events.

My concern is that now this pattern of balance sheet expansion has been set, there is no way back. Should the economy not recover sufficiently, the answer will be even greater stimulus. That’s not good for the currency.

If we look at the percentage of the BoE balance sheet that has been backed by gold since 1830, we can see that we are now at all-time lows.

Percentage of Bank of England balance sheet backed by gold

As Patterson notes on the chart above, the long-term average is for the BoE to have enough gold to back 25% of its balance sheet. Currently 2.7% is backed. (We have 310 tonnes of gold – almost ten million ounces – worth £10.8 bn.)

One way to return to this historical average would be for the bank to buy a heck of a lot of gold: 2,600 tonnes, about 90% of annual global production (2,850 tonnes). That’s not going to happen.

Another option to return to the average is for gold to have a dramatic upward spike – or more likely, sterling a downward one. That would give gold a £10,000 an ounce price tag – almost a ten-bagger from here.

But gold at £10,000? If we hit those numbers, we’d be well into currency crisis territory. I’m not sure sterling would survive that in its current form.

Of course, perhaps talk of these numbers is absurd. Another alternative is that the BoE never returns to the historical average of 25% gold backing. Gold remains, as Ben Bernanke calls it, “a tradition”. And the BoE is able to continue expanding its balance sheet at this rate without any consequence to the holders of the currency.

Me? I’m going with the absurd talk – at least for the time being.

Finally, my book. It’s a simple-to-understand look at the mess the West now finds itself in, and how changing our currency system could help us get out of it. And it’s almost funded now – I’m 87% of the way there. Any help to get me over the line would be much appreciated. If you’re interested in things libertarian, things golden or things economic, please take a look here.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

Our recommended articles for today

Looking for a great investment? Then follow the cash

The most important measure of how a company is doing is not necessarily profit. What ultimately matters, says Phil Oakley, is cash. Here, he explains why.

The fastest way to value an income stock

Dividend stocks are a good bet with interest rates at rock bottom. But how do you find a bargain? In this short video, Tim Bennett introduces one of investing’s simplest valuation techniques – the Gordon Growth Model.

  • Banker

    Why not £100,000? Why not £1,000,000? May be a billion or a trillion? OK you might hate fiat money – but gold is not the only protection from debasement. Virtually any tangible asset is a protection against hyperinflation. Gold is more or less useful crap with value to it assigned purely because it is rare and historically beenused as medium of exchange… I would be much more comfortable with another rare asset based currency…. For example buy lots of agricultural land, and issue ABS with 1 unit representing 1 square meter of the land. As land actually generates income this unit of currency could be even self-accreting. Large holdings of the currency could be made convertable into actual land.

  • Crazy

    Dominic’s article provoked an idea. It may be crazy but then so much that is going on today is crazy and doesn’t make sense. As the BOE can presently just print money and call it QE why not use some of this printed money to buy Gold and bring the reserves back up to the 25% level. Approximate cost at today’s level of Gold would be £100 billion. This would then shore up the currency and prevent a future run on the pound. It would seem to be a better use of the money than just giving it to the Banks but what do I know?

  • JREwing

    Great article. There may be some value in diversifying from gold into other “hard” assets (UK property does not really qualify here – more on this later). One alternative is to buy other metals that are relatively cheap compared to gold. Stocks for natural resource producers in a panic would be a good buy.

    In any case, all this is academic. The state will confiscate your gold outright if you keep it in the UK. Inflation is confiscation by stealth but you can also have more direct forms such as taxation and appropriation. The UK will not survive the next monetary crisis as a first world country. The long term trajectory is for it to end up as a second world middling economy with no real relevance to the outside world like Portugal. You think this is outlandish? The Portuguese were once the most powerful nation in the world – as were the Spanish. Where are they today?

  • JREwing

    To quote the late Prime Minister Callaghan, “if I was a young man today I would emigrate.” That would be excellent advice today.

  • nick

    @Crazy

    Because that would upset the status-quo and the blanace of power

  • simon

    Great stuff, Dombo. But for God’s sake do change you photo on the Gold Money website videos. It’s disturbing. And it’s hardly Spotlight is it, Luvvy ?
    ps to j.r. ewing… unfortunately they’ve debased the bolt holes too.

  • Clive

    Working out how many ounces of gold it takes to “buy the FTSE” ignoring dividends seems an irrelevant measure as dividends are a key part of investing in equities.

  • PJ

    @JREwing – Do you really believe The State will confiscate our Gold? If so, where do you suggest I transfer my BullionVault holding? Zurich or New York?

  • Teresa

    @ Clive

    Dividends are already priced in. The FTSE reached 1.2 oz in 1980, and I believe it was paying dividends back then, too.

  • John

    @JREwing has a point. Desperate governments take desperate measures. In 1933 President Roosevelt outlawed the private ownership of significant amounts of gold and silver in the USA.

  • JREwing

    @ PJ – I would transfer all the gold to Switzerland or Singapore if I were you (I did this with my gold). NY isn’t a good option in my view given America’s fiscal troubles. Also, if Obama wins, the US will be in the same boat faster than anyone can think. A better option would be to not only get the gold out of the country but also leave if possible (this is of course never a purely financial decision and depends upon one’s personal situation – and if one has children and a family it is much harder to do).

  • JREwing

    @ John – the problems this time are infinitely worse than in the 1930s US. In the 1930s, the Americans had to confiscate gold to devalue the Dollar as it was gold linked. But the government itself was not insolvent. The Government also had almost no debt and state spending was tiny in comparison with today. This time, we have more than half the voters living off the state. The politicians will resort to any measure available to them to squeeze what they can from the population that supports the state. This is already happening in France and will soon happen in Britain and the US. The terms “haves” and “have nots” will take on a different and uglier meaning.

  • David Atherton

    Good FTSE/gold chart showing 2000 was a bubble, but current market highs are not. I have posted a chart on MW FB site showing gold bull run is much less clear cut than it was up to 12m ago.

  • Boris MacDonut

    As usual Mr D Frisby uses a dramatic headline and gives it no substance. Of course Gold will hit £10,000. The question is when?
    The whole raison d’etre for Dominic seems to be to talk up Gold. Such that a 16% fall in two months is seen as a correction and with hindsight he tells us he predicted it. The man is obsessed with patterns and seems more keen on shiny things than the cast of the Big Fat Gypsy Wedding. The sooner MW drop this amn the better he is a one trick pony and soon to become a busted record.

  • Dominic Frisby

    Boris, may I recommend that you don’t read my articles? You’ll be much happier.
    Thanks
    Dominic

  • MartinR

    @ JREwing
    Where would you emigrate? Switzerland? Is it not a bit too small country to accommodate all the UK emigrants? USA? What if Barrack wins again? Europe? Really?
    Why the rich from all across the Europe are buying properties in London? Are they missing something? Or am I missing something?
    Please elaborate and enlight us, where and why whoud you emigrate.
    I am not being sarcastic here, I seriously would like to know your opinion. Thanks

  • JREwing

    @ MartinR – I think emigration becomes a feasible option only if you have a serious amount of capital and fear confiscation through draconian taxation. I wouldn’t put a figure on this but it would be higher than just a million pounds or two. If you have a lot more than that, there are a plethora of options. Of course, the vast majority of people in Britain or Europe or the US cannot emigrate. If they are reasonably productive and stay put, they will be cannon fodder for the growing population of people in the West that take home far more than they pay into the “system”. This problem will only get worse and worse with time with fewer and fewer people carrying the “burden”.

  • JREwing

    Cont…..

    If you are relatively young and do not have children but are well educated, you can emigrate to a number of places, work hard, save up and can have a happy, productive, fruitful retirement at the age that you deserve. The rest will be condemned to a life of slavery to the parasite state whose appetite is a bottomless pit.

  • JREwing

    Speaking for myself, I am not rich but aspire to be. And I can’t be in the kind of society that is now being created in the UK. The odds are stacked against you.

    I moved to Hong Kong a few years ago. I have friends who moved to Singapore. Yes their numbers are small. But these are bright, ambitious people. They are the sort of young people that the UK should be desperately trying to hang on to, not chase them away with their policies.

  • Ed

    Different people see completely different things in charts, the chart of gold versus ftse 100 shows the huge appreciation in gold over the last 12 years. Dominick looks at this and postulates that gold could hit £10,000 an ounce which is absurd in my opinion. He also says he has no real opinion on the ftse 100 or stock market. In my opinion looking at this chart you should not be buying gold but buying stocks and other assets that are cheap, thats what this chart tells me. Over the last 3 years gold has been in a $300 range between $1500 and $1800. Another thing when there is euro crisis money flows not into gold but into $US, when the euro declines , gold also declines along with everything else

  • MartinR

    @ JREwing

    Thanks for your thoughts.

    I can only agree with you. It is really frustrating to see how this system is penalizing success and supporting people who choose not to work, spending billions on wars and weapons or on the overpriced olympic games.

    Problem is that even here, on this forum, you have people who think the only issue is that the rich don’t pay enough tax. And if everyone paid “their share”, everything would be back to “normal”.

    And if you say that this country may eventually go bakrupt, you have people like BorisMcwhatever saying that this country will never go broke.

    Would be quite amusing if it wasn’t for real….

  • Barney

    When was the last time ‘our’ gold – apparently 310 tons – was audited? Is there physically 310 tons of gold in a BoE vault, or a vault controlled by the BoE? If so, does all, or only some of, or perhaps none of it, belong to the BoE? In other words is it Allocated? Or has all or some of it been swapped with other financial institutions (foreign friendly governments’ banks, IMF obligations, Euro obligations, or lent to bullion banks who may have sold it)? Is any of it double accounted? Who would be the external (truly independent) Auditors?

  • NeutronWarp9

    20-Ed. I think you are missing Dominic’s key point.
    The demand for gold will not increase 5-fold to achieve 10k per oz. Rather, given QE, the US dollar and pound sterling will be worth significantly less in due course and hence £10,ooo will be achieved via a combination of a chronically debased UK currency and perhaps increased demand from the rising ‘middle classes’ of the world and central banks.
    Neither do I share your confidence in the US as a safe-haven; it is every bit a bloated, broken model as the Euro. In the circumstances gold has to be a core holding. I agree that defensive, dividend-yielding shares are a prudent investment, but many currently cheap assets/stocks are so for a reason.

  • JREwing

    @ MartinR – Yes. But this state of affairs won’t last very long. The British debt situation is far more dire than what the government is willing to let on. It is also a fallacy to believe that Britain has not defaulted ever. After WWI, the government defaulted on its bonds by de-linking it from gold and engaging in massive money printing. This was a default in all but name. Same happened after WWII. And then in 1976, Britain would have defaulted but was saved by the Americans.

    Well, I won’t sound like a broken clock about the debt. The question is who will bail Britain out. It won’t be the EU and it is unlikely to be the US. I think we will see a massive inflationary programme to “cure” the debt. It won’t work. The problems are now not legacy debts but the bloated welfare state which has become unsustainable. Think Argentina. All of Europe and the US is Argentina now.

  • MartinR

    Well,that massive inflationary programme is firing on all cylinders, or soon will be. And, you are right, it doesn’t seem working.

    But I think we are on the wrong forum…

    Nevermind, nice to know that someone sane is still posting here .

    Thanks.

  • Boris MacDonut

    #15 Dominic. Unfortunately, in order to offer my usual balanced and well informed opinions I have to read widely. I do not so much “read” your articles as endure them. I do not believe that just because MW give you a chance to spout your nonsense on its pages means you are immune to criticism. If you choose to keep on repeating this rubbish you can expect such as myself to continue to rebuke you. You are beginning to sound like a stuck record and you will be caught out by randomness.

  • JREwing

    @ Dominic – I take the opposite view to Boris. If you stop writing for MW, I will terminate my subscription to MW. Many of your readers feel the same way. Hope there are many more such articles to come. Your articles are well reasoned, thoughtful and thought-provoking. I have refined my investment methods enormously as a result. Please keep up the good work.

    @ Boris – if you want to hear property perma-bulls, you can go to any pub in the country and 9 uninformed fools out of 10 will join you. You don’t need to waste your time, money and your energy here if you don’t like the point of view that Money Week takes.

  • Clive

    @15 Dominic. I’m sorry, that’s such a pathetic response – to suggest that somebody not read your articles just because they point out a valid (imo) hole in your argument. Odd how gold nuts are always banging on about “gold is the only currency” and “prices don’t move when priced in gold, only in fiat currency” but then have no explanation of the price of gold falling when fiat currency is unchanged. I’ll tell you the answer – it’s what it has always been – supply/demand for shiny stuff. Gold is no different to any other popular assets, often goes up, always goes down.

  • Cricky

    “This correction was predictable” , your articles on Gold seem to have a very vested interest tone to them, just how much Gold are you holding ?

  • Chris

    Thanks for the article Dominic. I look forward to your book .

  • Boris Macdonut

    #14 Sorry my usual accuracy let me down. The 2 month Gold price fall is only 6%. The annual fall is 12%. Of course we await Dominic telling us when Gold should hit £10,000 an ounce.
    It has taken since 1975 to increase ten fold and before that took since 1830 to do likewise .The historic precedents that Dominic seems to hang onto offer an average timescale of about 90 to 100 years for this 900% increase. So perhaps he is thinking 2100 ish.

  • Rhydian Shaxson

    Interesting article Dominic. Thanks.
    I haven’t read you before and I wondered if you had looked into the precious metals’ manipulation theories ?
    Ted Butler and Gata have long propounded. Large paper market shorting by the big banks manipulating the price -which the CFTC have been investigating for years but have never reported on.
    Interested to know your thoughts !

  • Stuart

    hmmm… Read….ignore…

    As you have boasted and given a link to a prediction you made correct, I presume for balanced journalism you will do this each time you are incorrect.

    Right…If I put $10,000 in my article title. Will that get enough attention for sales of my new book??? Try $50000 next time you might get more hits.

  • Mr Gullible

    oh dear!

    For a moment I thought I was on KWN or any of the other cultish websites which feed the appetites of the ‘desperate to get rich in fiat’ gold/silver bugs.

  • Boris MacDonut

    #33 Stuart. Dominic was not modest enough to say $10,000 in the headline, he said £10,000 which is in fact about $16,100.

  • Argentum

    Gold identically tracks US Debt and Debt Ceiling levels.

  • Boris MacDonut

    #36 Argentum. Well said King of the Silver Merchants.

  • HL

    Oh, dear. If gold is pointless (even ‘barbarous’ according to Keynes) why does it provoke so much anger ?

    If one buys a diamond, nobody sneers. People who own rare stamps don’t suffer hostility.

    Yet any mention of gold cues an angry chorus. Why ?

MoneyWeek magazine

Latest issue:

Magazine cover
Party's over for Putin

The only portfolio safe from Russia's rout

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Hedge fund manager Hugh Hendry: 'It felt like the sun rose only to humiliate me'

In a series of three short videos, Merryn Somerset-Webb talks to Hugh Hendry, manager of the Eclectica hedge fund, about everything from China to the US, Europe, and Japan.


19 December 1932: BBC World Service begins

The first royal Christmas message by George V gave the fledgling World Service an early boost six days after it was founded in 1932.