Before you gag on your coffee or suffer chest pains, allow me to explain.

We’re about eight years into the bull market, and gold has breached the $1,000 level twice and has spent weeks trading above the old high of $850. Some observers are now saying that gold’s pretty much had its day and that once the recession is over, it will retreat for good.

However, the four-digit gold price we’ve seen so far is with no price inflation to speak of, no effects of the atrocious increase in the money supply, and despite a rising dollar. What happens to gold when each of those pictures gets turned upside down – high inflation, excess cash jolting the economy, and a falling dollar? After all, gold’s performance to date has been powered only by general anxiety, not by any visible erosion in the dollar’s value.

I decided to take a fresh look at calculations that could be used to appraise gold’s upside potential. No one of them, by itself, comes with compelling logic. But they all point in the same direction.

Gold’s Percentage Rise in the Last Bull Market: What if gold in this bull market repeats the percentage rise in the last bull market? In the 1970s gold rose from $35 to $850, a factor of 24.28. Our low in 2001 was $255.95. Multiply that by 24.28 and you get a gold price of $6,214 per ounce.

U.S. Gold Holdings to Money Supply: The M1 money supply consists of currency and checkable deposits. The U.S. government currently holds 286.9 million ounces of gold. If the government were to make each dollar redeemable by the amount of gold it possesses, we’d arrive at the following price for gold: $1.569 trillion ÷ 286.9 million oz. = $5,468.80 per ounce

Gold/Dow Ratio: The ratio was about “1” when gold peaked in 1980, meaning the Dow and gold were the same price. To restore that relationship at today’s stock prices would mean when the Dow is at 6,626, gold should be at $6,626/oz. Of course, we think it likely that the Dow will get a lot lower before gold peaks. But even if it drops all the way to 4,000, that would imply a gold price of $4,000/oz.

All the Money in the World vs. Gold Reserves: If the public eventually sees the paper game being run by the central banks for what it is, governments will be forced to back their currencies with gold (and perhaps other tangibles like silver). Assuming they had to go into the market and buy the gold needed to restore faith in their currencies, the numbers might look like this: Total central banks reserves (including gold holdings) = $4.8 trillion, divided by 929.6 million ounces total gold reserves held by all official institutions that issue currency = $5,246 gold price.

U.S. Gold Holdings to U.S. Foreign Trade Deficit: The size of a country’s deficit or surplus would be of no consequence if all currencies were convertible into a fixed amount of gold. However, the dollar is increasingly considered a hot potato, and when the trade balance reverses, as it must, dollars will flow back to the U.S. and fuel domestic price inflation. Based on the cumulative trade deficit of $9.13 trillion (up from $6 trillion since June ‘07!) and U.S. gold holdings of 286.9 million ounces, the corresponding price of gold would be $31,822 per ounce.

U.S. Gold to U.S. Government Liabilities: Finally, the GAO (Government Accountability Office) calculates an income statement and balance sheet for the U.S. government. As you’d suspect, it is dominated by future liabilities for Medicare and Social Security. What if they had to be backed by the supply of gold? Official U.S. government liabilities now ring in at an incredible $55.2 trillion. To make good on that would require a $192,401 gold price.

No, we don’t think gold will hit $192,000 or even $32,000. And there really isn’t any surefire way to forecast the eventual high. But it’s clear that every weathervane is pointing in the same direction. So, yes, gold isn’t going to $2,000; it’s going higher.

When determining how to keep your wealth safe, the state of global affairs can be a powerful reminder that gold should be part of the strategy. And today our world, essentially, is on fire.

- Eastern Europe borders on bankruptcy. Brazil’s economy is falling off a cliff. Ditto Mexico.

- Protests have erupted in Latvia, Chile, Greece, Bulgaria, Iceland, Dublin, and parts of the U.S. Workers have gone on strike in Britain and France.

- In the U.S., 36 states and the District of Columbia have proposed or implemented reductions in the civil workforce. (You think customer service is poor now…)

- An astounding one in nine homes, 14 million, sits empty in the U.S. The December median price of a home sold in Detroit was $7,500. More than 8.3 million homeowners were upside down on their mortgage in the fourth quarter. Freddie Mac’s new CEO resigned after six months on the job.

- Last quarter, 12 U.S. banks failed, bringing the 2008 total to 25, the highest one-year death rate since 50 failed in 1993. More foreboding, another 252 banks joined the FDIC’s “problem list.” So far this year, 19 banks have failed.

- The central bank of Ukraine banned the early redemption of term deposits, the most popular form of savings in the country. Bank deposits have dropped 20% since September, as bank customers dodge the risk of getting locked in.

- The projected US$1.75 trillion federal budget deficit is almost four times the nation’s previous record-high budget deficit. The Times Square debt clock reads over $11 trillion. Japan’s now reads $7.8 trillion.

- High unemployment has become a worldwide epidemic, with the infection spreading.

- With world economies taking it on the chin, it’s little wonder that investor interest in gold as a safe haven is growing – a trend we expect to continue. And just wait until the dollar resumes its slide, the expanding money supply jolts the real economy, and inflation kicks in.

Given the ongoing turmoil and the swallowing darkness at the end of the crumbling economic tunnel, our recommended strategy here at BIG GOLD remains keeping one-third in cash, one-third in physical gold, and one-third in our selected gold stocks. New money for investment should be split among the same three categories; we just don’t see any safer places to be.

As economies around the world continue to shrink and governments continue administering larger doses of the wrong medicine, we’ll sit in relative comfort with our gold for protection and our stocks for profit. We expect the prices of both to rise as others join us.

Regards,

Jeff Clark
for The Daily Reckoning

Global Economics On Tilt – How to Protect Your Assets originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Does this describe your journey with gold?

Although gold’s had a good run, rising from a monthly average of $760.86/oz in November 2008 to $943.16/oz in February 2009, when will it take off? That’s still going to happen, right?

Wimpy, Popeye’s burger-loving pal, was always looking to get what he wanted today with a promise to pay tomorrow. Sound familiar?

In their thrashing attempts to get their economies going again, governments around the world have pounded interest rates into the floor and flooded their banking systems with liquidity. Take a look at the monetary actions from the G7:

Interest rates are at historic lows, an artifact of the robust, worldwide efforts to debase currencies. M2, one measure of money supply, is up in all G7 countries, which signals that tomorrow’s inflation is being baked in the cake today.

Further, bailout numero dos, with a rich pork filling, has been signed, sealed, and is about to be delivered, including an endowment for a “bad bank” that will buy up the loans that troubled commercial banks would like to deny they ever made. In addition, it guarantees hundreds of billions of dollars in bank assets – all on top of bailout numero uno. And don’t forget the estimated $493 billion the Treasury Department will have borrowed by the end of the first quarter 2008; that on top of $569 billion the government borrowed in Q408, an unprecedented amount for any quarter, ever.

The word “unprecedented” seems too weak to convey just how much money is being printed and/or borrowed to buy off the recession. So, when will all this money start showing up as higher prices at the supermarket and shopping mall? And when will gold react to this bumper crop of paper?

The historical record indicates that a surge in money growth has its peak effect on economic activity about 9 to 18 months later. Add another 12 months or so for the peak effect on consumer price inflation. In other words, the Federal Reserve is always driving with a loose steering wheel. Most of the experience behind those numbers is with relatively tame ups and downs in the business cycle – not the kind of financial violence we’ve been seeing lately – which adds another variable. And on top of that, the numbers are about peak effect, not initial effect.

So the timing remains uncertain. But what we do know is that there are clear and unavoidable consequences to wildly energetic money creation, including, sooner or later, rampant price inflation.

We’re beginning to see interest in gold from the mainstream, which is encouraging. And enthusiasm from the general investing public will be what ultimately sends gold to the moon. Here’s what we’ve observed over the past 30 days:

1. A number of mainstream economists and fund managers are openly expressing interest in gold. “The government can print endless money, but they cannot increase the supply of gold,” said Michael Pento, chief economist at Delta Global Advisors Inc. “Anything the government cannot replicate by decree, I want to own.” The firm, with $1.5 billion in assets, is doubling its gold holdings to 8%. We saw very little of this six months ago.

2. The mining industry has recovered its ability to raise capital. Take a look at the recent financings for some gold companies:

Newmont         $1.2 billion
Newcrest         $476 million
Kinross Gold        $414 million
Agnico-Eagle         $290 million
Red Back Mining    $150 million

Compare this to the financial woes we hear continually about banks, brokerages, and government agencies. The only capital they can attract is government handouts.

3. While there are much better ways to turn gold into cash, Cash4Gold (who advertised during the Super Bowl) and similar businesses bombarding the airwaves with their pitches have sensitized the public to the topic of gold. Expect the interest in the yellow metal – and its price – to increase in a serious way.

4. January’s Cambridge House Investment Conference in Vancouver was well attended, with the second day setting a record. Every session was packed, standing-room-only for most speakers, including Casey Research’s Louis James and Marin Katusa.

While no one was emphatic about the timing, most speakers agreed that at some point gold will be sought as a safe haven by the masses, who will catapult the price to new highs. Here is a quote from John Embry, chief investment strategist, Sprott Asset Management:

“The average retail investor has little or no investment in gold and no understanding of how important it will be. The year 2009 will be volatile, but volatility is a small price to pay for where gold is headed. An explosion in gold and silver is inevitable in the years to come.”

The overriding theme was clear: Gold is going up. Period. It may or may not happen as quickly as you want, but the recent range trading hasn’t defused its explosive potential.

So when will gold take off? The signal won’t be inflows to ETFs (although they are indicators), or jewelry sales (the ’70s bull market had nothing to do with bracelets), or even sales of physical bullion (we had that in ‘08 and gold was up 5.5%, hardly meteoric). No, the payday rise in gold will occur when there is a significant shift in the psychology of the general public.

And whether the glory days are just months from now or a year or two away, it’s clear that the oasis is real and lies ahead. Is your cup ready?

Regards,

Jeff Clark
for The Daily Reckoning

How Long Will We Have to Wait? originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.