In investing, there is “off the charts” and then there is “really off the charts” when it comes to bullish calls. And for investors, extremes tend to make waves in most sectors or stocks or markets. That’s true whether you’re talking about Dow 20,000 or Apple Inc. (NASDAQ: AAPL) hitting $500 a share – and particularly true about gold at $10,000 per ounce.
The idea of gold prices hitting $10,000 per ounce sounds ludicrous to some – perhaps as ludicrous as gold rolling back to $200.00 an ounce sounds to others. The Wall Street Journal‘s most recent mega-prediction of $10,000.00 from Shayne McGuire, who manages a $330 million gold portfolio for the Teacher Retirement System of Texas, is the one who is throwing this figure out there in this case. He has been a gold bull since 2007.
McGuire’s gold investment is half tied up in the SPDR Gold Shares (NYSE: GLD). His argument is based really on two major simple trends: currency devaluations and investor demand. A 1% asset allocation by all investors would create an influx never seen, and governments seem to be racing each other in currency devaluation.
The problem with such a call is that it is likely very much opportunistic and headline-grabbing, even if McGuire’s pressure to get TexPRS has virtually doubled the money in that allocation.
The second problem is that this gold call is not just inflationary. It is crushingly hyper-inflationary.
If $10,000 gold were even a possibility, it would be very possible that major governments would force-call gold. Franklin Roosevelt did this in the 1930s. There is another notion and that is the ‘gold standard’ for currency. The harsh reality is that the gold standard is a physical impossibility. There is just not enough gold in the world to even come close to a gold standard.
There are a few questions to ask about $10,000 gold. What would happen to the price of platinum and silver? Imagine the day that women could no longer afford jewelry of any kind. — other than ceramic or hemp. Where would interest rates be, and the DJIA for that matter? How much would consumer electronics and other consumer goods and industrial goods cost?
Anything is possible in this world. We had an internet bubble that placed valuations on newly formed web companies higher than key industrial companies with a hundred years of operating history. Still, $10,000 gold is a bubble above and beyond any consideration in a world of low real-returns and it would be a hyper-inflationary bubble of nearly an unquantifiable magnitude.
Gold can rise and rise. Some have gone on the fence for $1,500 or even $2,000 an ounce. Those are the real gold bulls. They say everything is bigger in Texas, and this call is an example of that. This call also goes above and beyond any black swan scenario. It seems about as likely as the end of the world in 2012.