**[investwise]** Ivan Martchev: Gold Is Going To $ 3700/oz

 

This is a crisis that began in the West and will ultimately actually benefit the BRICs. And right now as the markets ebb and flow, gold bullion is likely to have an upward bias as the central banks have already told you what they will do -- print.   So, I would rather spend more time on gold bullion as it is the only thing working right now -- it can protect you in the present environment. There are no guarantees in the markets, just odds that have to be stacked in your favor, and the odds with gold in your favor are huge. Not-So-Ridiculous Target Although I spent most the efforts in my book -- The Silk Road to Riches: How You can Profit By Investing in Asia's Newfound Prosperity -- identifying the best investments in China, India and the natural resource space, there are two chapters that dealt directly with the problems of the Western financial system. One dealt with the prospects of gold and had a long-term target: The [Dow/gold] ratio speaks volumes about the future of gold prices. In every case during the past 100 years when the Dow/gold ratio has turned down, it has moved all the way into the single digits, resulting in very expensive gold and very cheap stock prices. The ratio currently stands at 25. At the lows in 1980, the ratio stood at 1.3. So far, all the empirical evidence suggests that the ratio is headed toward its 1980 lows.   This won't happen overnight. The Dow surged 1,368%, from 800 to 11,750, in its 20-year run, with plenty of shakeouts along the way that augured the end of the bull market. If gold behaves similarly, it will reach $3,700 per ounce by the time its bull run is over. This will happen by the end of the current decade. Clearly, gold did not make it to $3,700 by the end of 2009. The above was written in early 2005 and it was published in early 2006. But, little of my thinking on gold bullion has changed and I believe the target will be reached. In doing research for the book, I found an expert that came up with what then looked an even more ridiculous target: In his 2003 article Inflation, Debasement, or Both, James Turk studied the monetary balance sheet of the dollar and reflected on the aggregate assets and liabilities of what he calls "the nation's money cartel," the Federal Reserve and the commercial banks.   The term "cartel" is appropriate, wrote Turk, since only the Federal Reserve and the banks have been granted by the U.S. government the special right to have their liabilities circulate as dollar currency.   Turk considered that there are two assets in the dollar's balance sheet: The U.S. Gold Reserve of 261.6 million ounces and government bonds owed to the banks and the Federal Reserve. In the period evaluated in his study, the M3 total money supply has grown nearly five-fold, while the value of the gold asset has declined by 35.9%.     Golden Dollars Monetary Balance Sheet of the U.S. 06/30/2003 12/31/1979 Assets     Gold @ $347.70 / $536.50 $91.00 $142.00 IOU's Owed to Banks $8,666.90 $1,666.30 $8,757.90 $1,808.30 Liabilities     FED Notes $646.40 $104.80 Bank Deposits $8,111.50 $1,709.50 M3 $8,757.90 $1,808.30 Source: Silk Road to Riches, Financial Times Press (2006) He identified two factors that have led to this decline. First, the total weight of gold dwindled by 3 million ounces from 264.6 million ounces. Second, the dollar's rate of exchange to gold had dropped by $188.80, or 35.2%. Since the quantity of dollars has increased massively while the amount of gold backing those dollars has declined in value, Turk concluded that the dollar has been debased.   Turk found that a 1979 dollar has 7.85% gold content, while a 2003 dollar only has a gold content of 1.04%. This is an 86.8% decline in the gold base of the dollar. Turk concluded that to fix the problem, it is not necessary to find more gold--the price of gold must rise in dollar terms. If the dollar achieved the same gold content it held in 1979, 7.85%, the gold price would be $2,624 per ounce.   Turk purposefully used 7.85% because it is the average monthly gold content of the dollar since the formation of the Federal Reserve in 1913. While the current gold content is the lowest since then, the highest content -- 29.9% -- was reached during the Great Depression.   If that happened again, the price of gold would be $9,996 per ounce. The basic assumption in the above study is that that the quantity of dollars remains unchanged, which Turk admits is highly unlikely. Given all that has occurred since I did all this research on gold bullion in 2005, even Turk's target does not look ridiculous anymore. How Can You Not Love Gold in the Current Environment? Our favorite ETF to play gold is the SPDR Gold Trust (NYSE: GLD) and we prefer to stay away from leveraged ETFs, other than for short-term trading as suggested last issue.   I expect gold bullion to sharply outperform the major gold stocks like the ones included in the Market Vectors Gold Miners ETF (NYSE: GDX), while major gold stocks are likely to outperform smaller gold stocks like the ones included in the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ). Do not make the mistake of thinking that GDX, the GLD and the GDXJ can be treated as proxies for one another.   I have seen days where gold is up and the gold stocks are down. While they all have a future, in my opinion, one should invest in a mixture of all three -- be it through ETFs or the individual components. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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