How Much Upside Is Really Left in Gold and Silver?

By Jeff Clark

With gold a stone's throw away from $2,000 and already up 30% on the year, the objective investor might begin wondering how much higher both it and silver can climb. After all, gold is nearing its inflation-adjusted 1980 high - and that peak was a spike that lasted only one day.

So, how much return can we realistically expect in each metal at this point? And is one a better buy than the other? There are dozens of ways to calculate price projections, but I'm going to use data based strictly on past price behavior from the 1970s bull market.

First, let's measure what today's inflation-adjusted price would be if each metal matched their respective 1980 highs, along with the return needed to reach those levels:

Based on the CPI-U (the government's broadest measure of inflation), gold is a couple of jumps away from matching its 1980 high of $850. Silver, meanwhile, has much further to climb and would return over three times our money if it reached its former peak.

But the CPI is a poor measure of real inflation. Let's use John Williams'

Let's look at one more measure. I think another valid gauge would be to apply the same percentage gain that occurred in the 1970s. From their 1971 lows to January 1980 highs, gold rose 2,333%, while silver advanced an incredible 3,646%. The following table applies those gains to our 2001 lows and shows the prospective returns from current prices:

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QE or Not QE, Asian Markets Are Driving Gold

by Alena Mikhan and Andrey Dashkov

We've seen some real gold volatility in action... up to nominal records then down in a quick retreat. So, what's next?

Much will depend on whether the US Federal Reserve will embark on another round of quantitative easing (QE3). If QE3 goes live, anticipation of future inflation will persuade many investors to down the trusted path of securing their capital in gold.

But the reality is that even without QE3, gold can go up - one is tempted to say it must go up. As discussed many times and in many ways, the economic problems already on deck are not being solved, and any one of them can make gold soar.

Gold is in the unique investment class of "ultimate safe haven." Demand will be much higher once push comes to shove and fiat currencies lose what little credibility they still have. This is developing, with or without another round of quantitative easing.

And demand for gold has been accelerating recently. The focus is now on Asia. China, India, and a range of smaller countries showed impressive demand for gold in Q211. The second-quarter update of Gold Investment Digest, published by the World Gold Council, reports on physical bar and coin demand:

Turkey and India were the two strongest markets, chalking up growth rates of 90% and 78% respectively. China (+44% year-on-year) also accounted for a significant portion of the growth in global demand.

It will be quite interesting to see third-quarter statistics, but anecdotal

"The surge in prices has sparked another gold-buying craze. The 50 gram and 100 gram gold bars were selling like hot cakes," said Ms. Liu, a store manager at Shanghai's major jeweler Lao Feng Xiang Co Ltd, who said gold sales this month were up at least 30 percent from a year ago.

Fall shall be an interesting season, too. The current price action is already hot, but traditional Indian and Chinese festive seasons are approaching, and those often boost gold prices. This may be one of the reasons why sales in Asia are flourishing at the moment - buyers expect the gold price to continue its ascent and want to use the opportunity to buy cheaper.