With the gold price holding above $1,600 an ounce, it seems the metal has found support at that level, but resistance is now sitting at $1,610. However, if you ask most gold bulls, it’s only a matter of time before that resistance level is broken. One bull thinks the steps needed to take the gold price to $10,000 are already in place.
Daniel Oliver of Myrmikan Capital makes a case for the gold price at $10,000 an ounce in a January report. He did not have a timeline for the move, except to say that it will be in the next financial crisis or perhaps the one after it. He believes the Federal Reserve has already printed all the money necessary to inflate the gold price to “well above $10,000 per ounce.”
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Gold price to $10,000: history lesson from the 1970s
Oliver noted that in 1971 when then-President Nixon closed the gold window, physical gold reserves in the U.S. have been held fairly constant. However, the Fed started buying “enormous amounts” of government bonds during the 1970s so that interest rates would stay low and to prop up government spending and “financial market excesses.” The value of the dollar collapsed by the end of 1980 because the central bank had increased its liabilities by 76% by buying government bonds.
Essentially, the Fed was printing more money, and as it did so, interest rates increased and the bonds the Fed holds to back the currency declined in value.
“It wasn’t that there were too many dollars chasing too few goods…” he wrote. “It was that each dollar was stripped of that which gave it value.”
Gold prices surged while the dollar was devalued and nominal interest rates increased.
Going into the 2008 financial crisis, he said the gold price increased to where it backed Fed liabilities by almost 30%. However, the central bank issued dollars to buy Treasuries and mortgage-backed securities then, “massively expanding its balance sheet and saving the malinvestments,” he said.
When the next rounds of quantitative easing were finished, the gold backing of the dollar was down to only 6%, versus 12% in 1969. In 2016, gold was trading at $1,050 per ounce, and it was half of what it had been in 1969 in terms of the Fed’s balance sheet.
One difference with the current situation and the 1970s is that in the 1970s, the Treasury bonds on the Fed’s balance sheet had a duration of only a few years. However, the duration is now more than 10 years. Additionally, the duration of mortgage-backed securities moves inverse to rate movements because few borrowers will refinance when interest rates are rising.
“At the moment, when the Federal Reserve prints money to buy bonds, the result is rising prices and falling interest rates, which keeps the government funded and financial markets aloft,” he wrote. “The end of the dollar will begin when this dynamic flips, as it did in the 1970s.”
When the gold price goes to $10,000
He said the market will eventually require a premium for protection against the weakening of the Fed’s balance sheet. The more money the government prints, the higher interest rates will go when that happens. And the more money they will need to print to cover the interest payments and deficit. Further, the dollar will fall lower and lower in value, while gold’s nominal price will rise higher and higher.
Oliver predicts that the next panic will require not only a bailout of the banks but also a reduction in rates to avoid a total liquidation. He believes that at some point, either during the next financial crisis or the one after that, the “market will discover that much of society’s wealth has become entrapped in non-cashflowing malinvestments.” He said when that happens, tax revenue will plunge, and the assets held by the Fed will become essentially worthless. He believes that’s when the gold price will head to $10,000 or the “multi-thousands of dollars per ounce.”