Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Gold at $13,000 an Ounce? Okay, How About $6,440?

Thursday, January 10th, 2013
By for Profit Confidential

In the past few weeks, there has been an influx of negative news about gold prices. News headlines vary, but, at the end of the day, it seems they all are against the yellow metal.

The London Bullion Market Association’s poll undertaken in late 2012 went as far as saying, “bull market in gold is over” under the theory that, as the U.S. economy recovers, investors will move towards different asset classes. (Source: Bloomberg, January 7, 2012.)

But haven’t gold prices been trending up for the last 12 years?

While the mainstream has been busy focusing on the gold prices declining, something interesting has happened on the gold chart. On January 4, when gold prices fell to as low as $1,626 an ounce, buyers rushed in and gold closed above $1,658. This is important, because it shows that there are investors who are willing to buy at that price level—possible short-term support. At the same time, it was the highest volume day since the end of November 2012.

Long-term; why am I still bullish on gold when everyone seems to be turning bearish? The reasons are very simple. Central banks are becoming net buyers of gold, and they are still printing their currencies at a record pace. They certainly haven’t announced when they will stop doing this, but if you follow them closely, you’ll see it may be a long time before they are done—the fundamental reasons for increased gold demand are still in place.

Where are gold prices heading next? I can’t give you the exact number, but when looking at the Dow Jones Industrial Average and gold ratio, I can say gold prices might reach $13,000.

Some economists and gold bugs believe the ratio of the price of one ounce of gold bullion to the Dow Jones Industrial Average will ultimately be one to one. Sound crazy? Well, in February of 1933, the Dow-to-gold ratio reached 1.94:1 and it touched 1.29:1 in January of 1980. (Source: Macrotrends, January 4, 2013.)

 $INDU $GOLD Dow jones industrial average Gold spot price stock market chart

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Chart courtesy of www.StockCharts.com

The chart above shows the weekly Dow-to-gold ratio. Currently, the ratio is standing at 8.10—meaning, to buy the Dow Jones Industrial Average, it will cost 8.10 ounces of gold. For it to get to the one-to-one ratio mark, either the Dow Jones Industrial Average will have to fall substantially or gold prices will have to rise, or more likely a combination of both will happen.

Let’s say the Dow Jones Industrial Average falls back to where it was when the bear market started: 6,440 on March 9, 2009. In that case, gold prices would need to rise to $6,440 for the one-to-one Dow-to-gold ratio to be reached.

Dear reader, the future prospects for gold prices are nothing but shiny. A little dip in prices is normal and it is not fazing me the least. As long as central banks run their printing presses in overdrive mode, you can expect gold prices to go higher.

Where the Market Stands; Where it’s Headed:

While it’s still early in the month, stock prices have remained relatively flat in January. Since 2010, stocks have always enjoyed a healthy rally in the month of January. Could this year buck the trend? I wouldn’t be surprised. Rising stock prices look like they are running out of gas.

What He Said:

“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher—because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi in Profit Confidential, June 2, 2005. Michael recommended Google stock as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5, 2007, when Google reached $700.00 U.S. per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s message was to trade each $700.00 share of Google into $700.00 of gold, because he saw gold as a much better investment.

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  • DFW

    During the Bush Lite years, the price of gold quadrupled. Since Bush left, the Dow has practically doubled and gold is up 65%. I'm leaning toward a big plot of arable land near some unpolluted water with a lot of edible fish in it, myself.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles