Jeff Clark

With gold a stone’s throw away from $2,000 and already up 27% on the year, the objective investor might begin wondering how much higher both it and silver can climb. After all, gold is nearing its inflation-adjusted 1980 high — and that peak was a spike that lasted only one day.

So, how much return can we realistically expect in each metal at this point? And is one a better buy than the other? There are dozens of ways to calculate price projections, but I’m going to use data based strictly on past price behavior from the 1970s bull market.

First, let’s measure what today’s inflation-adjusted price would be if each metal matched their respective 1980 highs, along with the return needed to reach those levels:

Gold and Silver Returns Needed to Match Inflation-Adjusted Price

Based on the CPI-U (the government’s broadest measure of inflation), gold is a couple of jumps away from matching its inflation-adjusted 1980 high $2,330. Silver, meanwhile, has much further to climb and would return over four times our money if it reached its former peak.

But the CPI is a poor measure of real inflation. Let’s use John Williams’ Shadow Government Statistics calculations. His data are much closer to the real world, and the statistics are calculated the way they were during the Carter administration, stripped of later manipulations.

Check out how high gold and silver would soar if they adjust to this level of inflation:

Gold and Silver Returns Needed to Match ShadowStats Alternate CPI

Clearly, both metals would hand us an extraordinary return from current prices. Those are some admittedly high numbers, but keep in mind that’s what the CPI figures above would register if government officials had never changed the formulas. What’s tantalizing about these levels is that we’re not even halfway to reaching them.

Let’s look at one more measure. I think another valid gauge would be to apply the same percentage gain that occurred in the 1970s. From their 1971 lows to January 1980 highs, gold rose 2,333%, while silver advanced an incredible 3,646%. The following table applies those gains to our 2001 lows and shows the prospective returns from current prices:

Gold and Silver Returns Needed to Match 1970s Total Percent Gain

Gold would fetch us nearly four times our money, while silver would provide a quintuple return.

Regardless of which measure is used, it’s clear that if gold and silver come anywhere close to mimicking the performance of the last great bull market, tremendous upside remains.

One might be skeptical because these projections are based on past performance, and nothing says they must hit these levels. That’s a valid point. But I would argue that we’re in uncharted territory with our debt load and money creation — and neither shows any sign of ending. We had a lot of problems in the 1970s, but our current fiscal and monetary abuse dwarfs what was taking place then. The need to protect one’s assets gets more pressing each day, not less so. That, to me, is the key signaling this bull market is far from over.

One may also be skeptical because the media continue to claim gold is in a bubble. To date, their proclamations have been nothing but a great fake-out, every time. Want to know when we’ll really be in a bubble? When they stop saying it’s one and actually start buying and recommending gold. When they begin running 15-minute updates on the latest gold stock. When you are sought out relentlessly by your friends and relatives because they know you know something about all this “gold and silver stuff.”

All told, I think the baked-in-the-cake inflation — rooted in insane debt levels and deficit spending — will be one of the primary drivers for rising precious metals this decade. This means the masses will look for a store of value against a plunging loss of purchasing power. Enter gold and silver.

The current correction may not be over, and we can count on further pullbacks along the way. But the data here suggest the upside in gold and silver is much bigger than any short-term gyration — or any worry that may accompany it.

Regards,

Jeff Clark
for The Daily Reckoning

Jeff Clark

Having worked on his family's gold claims in California and Arizona, as well as a mine in a place to remain nameless, Jeff's research and writing skills are utilized in his role as editor and one of the primary writers of Casey's Gold & Resource Report.

Whether it is researching new companies to recommend, analyzing the big trend in gold, or looking for other safe and profitable ways to capitalize on the bull market, Jeff is devoted to making Casey's Gold & Resource Report the best precious metals newsletter for the prudent investor. He coordinates the efforts among the research and writing team, ensuring that whatever is happening in the gold and silver market doesn't escape coverage.

  • OutdatedInfo

    “With gold a stone’s throw away from $2,000″

    Uh, where have YOU been these last few days?

  • Montezuma’s Revenge

    Robert Prechtor at Elliot wave was predicting gold under $200 for a long time. But it never got there.

    Maybe that time is coming?

  • Jackpine

    I’m invested in the metals, much more heavily on the silver side of things. I can see how you can say that the inflation-adjusted price of gold would be X, but I really don’t think it’s fair to use $50 as the 1980s high that we’re adjusting for inflation since “…its former peak” was manipulated into that position by the Hunt brothers. Taking their shenanigans out of the equation, I think the high that we need to be adjusting for inflation should be much lower. Not saying I wouldn’t like to see it get to the levels you and others are throwing around, but I just don’t think it’s realistic.

  • http://www.mygold.co.nz Rich

    People need to know that investing in gold and silver requires patience. It is not an investment that will pay in 1 or 2 years. You must be ready to hold it for 5 or 10 years until it is time for you to get out and profit from it.

    Prices as of now, means nothing. We didn’t even reach $2000 and people are screaming because it went down to below 1600. Now is nothing more than a BUYING opportunity for those who instead of putting their extra cash in savings, want to put in something more real, like gold and silver.

  • Bruce Walker

    Agree that the pull-back is temporary. Cheap borrowed money chasing gold and silver has to lead to volutility, and that we are actually seeing some finally is actually very encouraging. Hundred dollar moves in a single day are very bullish, and while it would be nice to see those moves on the upside, given the run-up we’ve already had wild swings even if to the down side intitially, are actually a good development for a more meteorotic ascent.

  • Rusty Fish

    For every dip is a buying opportunity, no matter how deep it is. For every down is the incipient climb to meteoric rise. Fickle mindedness ends up nothing, eventually.

  • David X

    Silver’s historic price (when it was used as money) is 1/16th of gold.

  • uuuuuu

    Soon you’ll be start worrying about your downside risk, instead of how much upside is left in gold/silver. That will be the middle of wave 3 to the downside… on the way to sub $1000 (for gold). I’ll be ready to buy then!

  • Rusty Fish

    The big govt riskily squeezed through another shut down. Shut down seems to be another business jargon. What are the odds of materialized shut down against the backdrop of forthcoming regular shut-down popup? What omen it will usher as regard routine market? Surely, investors are not intimated by the choppy market waves. Buying the downs or selling the ups is just ordinary business.

  • Bernie Madoff with your money

    Gold down another $40 today.

  • CarlMak

    Investros of the world unite. You have nothing to fear. But, golden opportunity unveiled before. You are invited to a roller-coaster ride.

  • spdrdr

    I do not comprehend the ShadowStats chart above – surely the differential rise under “official” CPI (first chart) would be completely proportional using the “unofficial” CPI via ShadowStats.

    Gold goes up ~6x in the second chart, while silver goes up ~2.5 times.

    Am I missing something?

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