Risk Latte - Is Gold going to hit US$3,000 per ounce?

Is Gold going to hit US$3,000 per ounce?

Rahul Bhattacharya
Dec 11, 2007

A week back I met up with two former investment bankers who have set up a boutique investment advisory company in Hong Kong and are about to launch a hedge fund which would invest in precious metals, especially Gold. They have been talking about how gold price will smash all ceilings for a couple of years now and I for one have been impressed by their predictions so far. Anyway, last week over drinks at Isola, the second floor restaurant at IFC, overlooking the Hong Kong harbour and Kowloon, one of them brought it out again: "Rahul, gold is going to go to US$3,000 an ounce in less than 3 years time. And we want to be there when that happens." And then the other one said the strangest of the things: "Our investment would be in physical gold....we'll buy gold bars and store them in Switzerland.....storage costs of fifty basis points a year is nothing. In the end, the real rich will have those biscuits (gold bars) in their hand and the rest of the world will be sitting on paper"

One can laugh off such a thing or take it very seriously. I did neither, because I was transported to another time in the past, almost twenty years back.

In the summer of 1986 when I was visiting my grandmother in our ancestral house in Calcutta I had casually asked her: "why do you buy all this gold jewelry for your daughters, daughter-in-laws and grand daughter-in-laws? Do you think the value of all this jewelry will keep going up forever? ......Ok, I understand, if Ma (my mother) sells it all after ten years, I am sure she'll get a lot of money. We need the Rupees (India's currency) to live and eat, not these pieces of metal."

My grand mother had replied: "Never ever talk about selling this jewellery. It doesn't matter whether you get one rupee or ten lakhs (a million) for them, you never sell them. What matters is that you have gold."

I wanted to tell her that if you cannot sell the gold (jewelry) to realize cash and if you cannot eat them or consume them then why bother buying them in the first place? But then she was my grandmother and I loved her too much to offend her sensibilities. Also, it intrigued me a lot that a seventy plus year old woman, with very little formal education, had expressed an opinion about gold that was so similar to the one expressed by another individual, fifty years her junior and an Ivy league MBA under his belt.

A couple of months before I had this conversation with my grand mom, I had had met up with a friend of mine who was in a top business school in the US and was visiting India. Over a "dhaba lunch" in the north Delhi University campus he had lectured to me, during the entire course of lunch, about gold standards and Bretton Woods and how the US Federal Reserve and other Central Banks in seventies had destroyed the value of their currencies; he went to explain that the US Dollar was practically worthless in the mid-to late seventies due to inflation, until some one named Paul Volker - to him he was something of a hero - had come to the rescue and squeezed out the demon - the inflation - from the US economy. He concluded his arguments by asking me whether I knew that the price of gold had touched an all time high of US$850 on Jan 21, 1980 and then there had been a steady decline in its price since then; but one of his professors knew a group of conspiracy theorists on Wall Street who thought that Gold will soon hit the ceiling again. And then he said (and I am sure he must have been mimicking his professor), in a grand theatrical gesture, "what matters is holding that shiny yellow metal in your hand." He was brilliant in his exposition. And then he rested his case: "The real demon in the economy was inflation. And the anti-dote is the gold."

Apparently, he had some sort of thesis presentation coming up, and this was his dress rehearsal. To me this was all meaningless in a very positive way. I was listening to a good friend of mine talk about something that could as well be Greek mythology or herbal medicine, but was happy at the same time watching him express his views so confidently and passionately.

I was twenty three years old then and had never ever heard of US Federal Reserve. I was into statistical physics, Feynman lectures, Beatles and day dreaming what kind of a place was Caltech. The only two persons I knew of who had Paul as their first names were Paul Anka and Paul McCartney. I distinctly remember my friend's annoyance and frustration, when I briefly interrupted his discourse and asked him who Paul Volker was.

All of that has come to pass now. My grand mother is no more and my mother still weeps once in a while when she sees my wife wearing some of my grand mom's jewelry in some wedding party. My friend is now a very successful investment banker in London and he displays his MBA degree prominently in the living room of his posh South Kensington home. And I run my noodle shop in Hong Kong, barely eking out a living, and once in a while end up talking to hedge fund managers who are perhaps peddling myth.

And so, coming back to the present, to that conversation with those two hedge fund managers in Hong Kong recently, I asked them as to why they thought that gold will hit 3,000 dollars an ounce? Even with their track record in mind, that seemed a bit far fetched to me, if not downright absurd. Their response was: "Inflation." Their argument was: take the inflation of the late seventies and very early eighties and take the low inflation of today and then adjust the gold price. We will see that if we adjust for the inflation the gold should be at 3,000 dollars per ounce to really hit an all time high, or rather, inflation adjusted, all time high.

I do get it, but then I don't get most of the stuff regarding economics and high finance. So I simply kept quiet. I wish I had said to them what my fried had told me all those years ago: "The real demon in the economy was inflation. And the anti-dote is the gold." At least I would have shown some semblance of intellect.?

Note: This is not a research or analyst report. This is personal blog. Risk Latte Company and/or any of its members, including the author of this blog, is not a registered investment advisor. We do not advise anyone to buy, sell or invest in gold unless he or she has taken advice from a registered investment advisor or bank.

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