Funny Money Report: Gold Could Reach $3,736.13 Per Ounce

Gold Could Reach $3,736.13 Per Ounce
BY: Lee Rogers
POSTED: 04-21-2007

From 1982 to 2000, the Dow Jones Industrial Average went from a bottom of 776.92 to a peak of 11722.98. This represents an annual compound return of 16.8% over the course of 17 years and 5 months. Ironically this rate of return is almost identical to the annual rate of return gold is delivering in its current bull market run. If we say for argument sake that the gold bull market lasts the same amount of time as the previous run in the DJIA from 1982 to 2000, we can project a gold price of $3,736.13 per ounce of gold by 2016.

Gold bottomed at $252.80 on July 20, 1999. 6.81 years later on May 12, 2006 gold peaked at $725 per ounce. This represents an annual rate of return of 16.7% which is only .1% off from what we determined the DJIA’s annual rate of return during its bull run from 1982 to 2000. Based upon the 16.7% annual rate of return this is how we came up with the $3,736.13 per ounce figure by 2016. This is actually a conservative figure considering that the last phase of the past two bull markets both the 1970’s precious metals bull and the DJIA bull from 1982 to 2000 ended in mania. The general public entered the markets which meant there were no more buyers and subsequently the long term bulls ended. We could very well see the same thing happen at the end of this bull market in precious metals. It would not be out of the realm of possibility to see gold go up to $5,000 or $10,000 in such a situation. I believe this to be a possibility considering that unlike the 1970’s we have China and India as factors as well as a chronically devaluing USD thanks to our friends at the Federal Reserve.

Using this same analysis we can also roughly determine a peak in gold for 2007. Based upon a 16.7% rate of return compounded for 8 years we arrive at a gold price of $869.64 sometime this year.

This might seem a bit high but considering the lack of interest in the precious metal markets at this moment in time, I don’t believe that to be the case. I still consider this a good time to buy gold and gold stocks simply because of the perceived lack of interest by general market participants. If we examine the traffic ranking of Kitco’s web site which is by far the most visited precious metals site on the Internet, we can see that traffic has bottomed out since the May 2006 peak. What’s even more interesting about this is the gold price isn’t too far off from that May 2006 peak and if we use Kitco’s web site traffic ranking as an indicator, the public has little interest in gold right now. As far as I’m concerned this means we still have a buying opportunity at current levels.

One ratio I follow religiously to determine if gold stocks are fairly priced in relation to the price of gold is the gold to XAU ratio. Amazingly, the gold to XAU ratio is currently at 4.81 which means that gold stocks are still cheap compared to the price of gold. That might seem hard to believe considering the recent run up in both gold and gold stocks, but when gold retraced back to $640 we believed that the market was vastly over sold. At that time the gold to XAU ratio was at 5.00 which I personally have never seen in the past few years that I’ve followed that ratio. That marked a strong buy signal for gold stocks and since that point in time we have seen a surge in gold mining stocks.

On a short term basis I do believe that we will be seeing some more resistance around the $700 level simply because of the market psychology involved with round numbers. We will also likely encounter resistance at the May 2006 peak. Once gold successfully breaks these levels we should see it make a move much higher. If we don’t hit our 2007 price target of $869.64 based off of our analysis, we should definitely see the gold price hit that mark in 2008.

Throughout this precious metals bull market our portfolio of gold, silver and commodity related stocks have performed extremely well. The recent surge in commodity prices has produced solid gains for many of the stocks that we own including new stocks that we purchased in the past few months. Over 80% of our stocks are in positive territory since our purchase date. We are planning on adding a new gold stock to our portfolio on Monday. To buy access to our portfolio and find out what stocks we own and what stock we are adding to it, check out the front page of our site located here.