Gold To Reach $10,000: The Case

Gold will reach $10,000 an ounce, or so says investment manager Shayne McGuire, who  runs a $330 million gold portfolio at the Teacher Retirement System of Texas, according to The Wall Street Journal

McGuire reasons that if major pension funds put only 1% of their assets into gold that demand would so overwhelm supply that a sharp move up would be inevitable.

Gold’s recent price increase has been impressive, from under $800 in late 2008 to over $1,300 today. But, it is not likely to even double from current prices. Inflation, even if it reaches 10%, which is unlikely, would make gold one of a large number of hedges. And, investors would probably be wary about an investment in a commodity that has appreciated as much as gold. Equity investors learned the same lesson from stocks in the 2006 to 2009 era when the DJIA rose from 10,000 to over 14,00o and then dropped to 6,600 in March 2009. The Dow has hardly moved at all in five years.

An increase in gold value that would be seven-fold by McGuire’s calculations means that  pension funds would want a hedge against, among other things,  the value of the dollar, Federal Reserve actions that might cause inflation and inflation itself. Pension funds have a number of investments that they have already decided are attractive in the event that inflation begins to return. Among those are other metals, emerging market stocks, oil futures, and private equity/venture funds that have track records that show they can produce strong returns. Some hedge funds also have long-run returns that have substantially outperformed the broad equity market.

The value of gold, to the extent that it is tied to inflation, depends to a great extent on GDP growth driven by consumer purchasing power. Inflation has not only dropped to nearly zero, but unemployment and real estate prices are likely to keep it low for years.

Gold may reach $10,000 in the next several decades if McGuire’s analyses is correct, but macroeconomic factors as they are today and are likely to be for the next several years should cause the price of gold to fall–not rise.

Douglas A. McIntyre