Why Gold Could Reach $20,000 an Ounce

By Tom Dyson       Jun 17 2008 1:35PM www.dailywealth.com

The amount of liquid savings I keep in gold would make the average investor choke.

In fact, on the occasions when I have told people how much of my money is in gold, they think I'm nuts. Gold represents over 50% of my savings. When folks hear that, they think I'm making a crazy speculation on the price of gold. Or they think I'm an eccentric.

I tell them investing in gold is the safest place to keep your money. It's the modern equivalent of putting money under the mattress. Gold is such a conservative investment it doesn't even pay an interest rate.

Here is why I like gold:

To stave off the housing and credit crisis, politicians have increased the amount of paper(and electric) money in our financial system. If you double the number of dollars in the system, for example, then the market should make you pay double the number of dollars for an ounce of gold. If you increase the quantity of paper money by a factor of 20, the gold price should also rise by a factor of 20.

This is simple mathematics. It's the same calculation for tailored suits... loaves of bread... or rare seashells. Double the quantity of money, double the prices.

Chris Weber, the editor of the excellent Weber Global Opportunities Report, makes the calculation in the most recent issue of his newsletter. He adds up the value of all the paper money in the world... and comes up with $100 trillion. Then he divides this by the total amount of "above ground" gold in existence – 5 billion ounces – and comes up with a fair value of gold at $20,000 an ounce.

If Chris Weber's calculations are correct, the gold price would need to rise about 22 times to match the rise in the quantity of paper money in the system.

For gold to reach $20,000 an ounce, people would have to lose confidence in paper money. I think this will happen eventually... just not anytime soon. And of course, this calculation is theoretical. I'm not predicting $20,000 gold. The point here is lots of paper dollars are floating around, but only so much gold.

Normally, gold is an expensive investment to own. That's because it doesn't pay interest. And you have to pay a small cost to maintain a safety deposit box. So you lose a few percent a year in opportunity cost of not investing in the bank.

But right now, that penalty doesn't exist. My bank pays 1% interest in its savings accounts. Ten-year U.S. treasury bonds pay 4% interest. The government says inflation is running at 4% a year. I think it's higher... around 5%-7% per year. The fact here is that real interest rates are negative. You can see this "penalty on savers" in the chart below, which shows real interest rates over the past 12 years:

That's why I keep my savings in gold. It's a safe investment with huge upside, and I pay no interest penalty for making this bet.

Other people are starting to figure this out. That's why gold has risen from $250 an ounce to $900 an ounce over the last six years. I don't see our growing inflation disappearing anytime soon... and I see commodity prices in a long-term uptrend.

That's why I'm comfortable with such a large gold position... and why gold's bull market still has a long way to go.

Good investing,

P.S. I'm so bullish on gold, I've arranged for readers of this essay to have full access to our DailyWealth report,The Two Best Gold Investments Right Now. In this report, you'll learn the real drivers of the gold price, why gold has a place in every portfolio, and the best ways to own gold right now. Click here to access it free of charge. http://signups.dailywealth.com/signups/signup/63.html

Tom Dyson

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Tom's articles have appeared in the Daily Reckoning, the largest e-letter in America, and many other well-known contrarian websites.