How Will We Get to $2,340 Gold?

James DiGeorgia

Ever since Goldman Sachs (GS) issued a sell recommendation at $1,500, gold has been dropping like a rock.

On top of that, a lack of inflation and the sluggish world economy have upended, at least for now, the bull market in precious and industrial metals.

Several prominent technical analysts are now warning that if gold breaks the $1,125 support level, the crowd (what’s left of it) will run for the door.

I won’t be following them.

Predictions that gold will fall back to its 1980 high make me very happy. That’s because I know where the yellow metal is really heading, and I’ll give you that exact number in just a moment … and how you can arrive at this very same figure yourself …

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Gold Setting Up for a Quick

Bounce … Shorts Beware!

I’m bullish on gold in long term. In fact, I think the market will eventually become red-hot.

Unlike many gold analysts, I think gold is heading much higher because its supply-side balance is about to suffer a MASSIVE SHOCK thanks to international speculators.

I’m not talking about individuals moving the markets. I’m referring to big speculators — literally hundreds of millions dollars in shorts from Asia and Europe, coming from exchanges around the world.

Traders and market experts see what’s going on, and it’s worthwhile to watch the near-term action … and reaction. Just last week on Yahoo! Finance we learned that …

“A trader in Sydney said selling emerged ahead of the opening of Chinese markets, adding that stop-loss orders were triggered when gold was sitting on the edge of $1,200.

“Prices failed to find support even after markets opened in China, the world’s second-biggest gold consumer.

“‘Chinese buying is not strong enough to support prices. Instead, speculators in China are selling,’ the trader said.”

My research tells me that we are setting up for a $200 to $300 bounce … and it will be quick when it comes. I expect the swing in the price of gold down and then back up to as much as $300 to take only 72 hours, perhaps less.

But $1,400 to $1,500 gold in short order is just the beginning.

Goodbye, $1,200 Gold?

How do I know this? Well, it all starts with what gold costs to produce.

As with most physical assets, gold’s most-important pricing factor is the total cost of production (or replacement). If producers aren’t making money, they stop producing.

And for the affluent who like to wear their wealth in the form of gold jewelry … for the central banks who hoard gold to prepare against disaster … and for investors who add to their gold holdings to both hedge and build their wealth, especially in the face of a declining dollar … there simply is no substitute for the yellow metal.

And right now, today’s low gold prices are simply unsustainable for the industry.

Since I wrote my gold book (“The New Bull Market in Gold”) in 2003, the precious metals industry has consolidated through mergers and acquisitions. As they get bigger, these companies expand their operations beyond gold production and include other precious metals and mining businesses.

Just as there are no pure oil exploration and production public companies, there are very few pure gold mining companies. It is difficult to determine the cost to produce gold for some diversified precious metals miners.

WGC: Standardized Production

Prices Could be on the Horizon

Another important recent development in the precious metals industry is the re-evaluation of their costs. For decades, precious metals companies were understating their costs.

Now, major gold producers and the World Gold Council are working on a standard for the industry that better represents the total cost of producing gold.

The final standard is expected in the middle of this year. The biggest changes will include long-term costs like capital expenditures.

I analyzed the total costs of producing gold for six precious metals companies (four large and two small). Below is what I’ve found:

The average cost of both small and large precious metals companies is $1,104 per ounce of gold. As expected, on average, smaller companies have a higher cost per ounce than large companies, but not by much.

Compare the total cost for gold in 2003 ($164) to the 2012 total cost ($1,104).

If we compare apple to apples via Barrick’s cash cost in 2003 of $177 to its 2012 cash cost of $584 (we’re not using the “all costs” of $945 in the table), we see an increase of about three times.

This is much higher than the rate of inflation.

We’ve seen that whenever prices go below cost, producers will normally cut production until prices recover. Therefore, the breakeven point is good support for an asset’s price.

Can prices go below breakeven? Sure — but normally not for very long. Prices can also move above historical premiums.

We’ve also seen that part of the price of an asset is its cost to produce (or replace), plus a premium. For housing, the premium can range from a small amount up to three times the cost. For silver it’s two to four times. For oil, the premium is normally about three times its cost.

If we add the historical premium, we can forecast price targets for gold:

The average total cost to produce gold is about $1,104, and this should act as price support.

Note that this is a moving target and has been moving higher (much greater than the global inflation rate) as costs have jumped.

Gold demand promises to remain strong. Meanwhile, gold’s cost of production provides a floor under prices, and historical premiums indicate the $2,340 level as a price target.

How Will We Get to $2,340 Gold?

The first leg of the current bull market in gold was driven by fear and financial market panic. The next leg of this bull market will be driven by the skyrocketing cost of gold production, which will trigger an enormous number of mine closures.

Gold may be set to nearly double from current levels, but it didn’t drop in a straight line and it won’t return to (and surpass) its previous highs in a straight line, either.

For now let’s watch and wait to see if it overshoots. If you own gold, you can stay put. But if you’re looking to add to or initiate a position here, my suggestion is to do nothing and to get ready to buy when the time is right. And stay tuned to your inbox on Mondays for my updated outlook.

We have a lot of ground to cover together in the coming weeks, and I look forward to showing you when to jump into a new opportunity and when to exercise patience. And when it comes to gold, let’s leave the kneejerk reactions to everyone else, and we’ll make our own moves with confidence.



Your thoughts on “How Will We Get to $2,340 Gold?”

  1. Gentlemen:

    The Cartel knows the “score” since they run the business, praecious metal business” not the investors per se. They know that the financial structure worldwide is “broken” and precious metals his torically speaking of course, is the “only” way out; paper money when the right time comes is “kaput” – so what do they do? They do what they already have done, lowered the prices on precious metals so that they can load up on them for “cheap”. Good business sense I would say wouldnt you. Who lost bigtime? the people that sold their precious metals at a loss of course – and that includes the big shots as well as the little shots! People who held, lost nothing, their wisdom protected them knowing why prices dropped like a bomb!

    Its a racket of course – the whole of wall street is a racket of course, rackets of all sorts proliferate our world economy; who suffers? the same people who have suffered for years; the “peones” of course! Now the peones are the middle class since the bottom of the real poor was breached hundreds of years ago – and who cared? Noone of course despite what the politicians lied about; now the middle class surplanted the real poor – who never even bothered to vote since they knew “there was nothing in it for them”; knew that their favorite politician was an exceptional “liar” , so why bother.

    So the banking industry along with the financial industry i.e. Goldman Saks etc., purveyors of legitimate and illegitmate means of making billions of dollars, so powerful that “they cant fail even if they tried to failure, our crooked politicians, along with some honest politicians, along with our president and all of the top government officials, fearing an uprising by the masses, printed money in the billions to keep these rogue institutions in business, i.e. 200 meltdown of coiurse!

    Why then is gold so important if paper money does the trick? Well these refined educated “crooks” are “not stupid” crooked they are, that is for sure, but “stupid” noway nohow” they know exactly what they are doing and that includes the Federal Reserve of course; Bernanke is also not stupid, he knows what he MUST do, and is doing it! and who replaces him will do the same thing – that is “keep printing money” – when the axe falls, at that time, they will let it fall! and they are all waiting for that time of course! Will anyone “go to jail”? of course not, since our president chose Bernanke, he would also have to go to jail, etc. that will never happen. Did the provokertors of 2008 go to jail? of course not? Its the story of the fox guarding the chicken coop – the crooks all have their hands in the pot – stealing hand over fists – control the media so people stay in ignorance – that is until they go into the streets like the non sectarians in Egypt went into the streets to unseat a democratically elected tyrant/ Hitler of coiurse was democratically elected. Huey Long in Louisiana was also democratically elected, – democracy is the greatest invention of Mankind, however democracy has “no power of tyrants, people who use people like Hitler, and Long used, to become the dictators they were. We had one in our ciity of Boston, Mayor Curley had no opposition; mayors in NYC were ruled by thugs, criminals democratically, so what’s going on here. It means that democracy is not a perfect system,there isnt a perfect system where people’e egos are involved, once that is thrown into the mix, the Constitution also means nothing, nothing at all. And who predicted this way way back right after we defeated the British, no less than Jefferson of course – he say the danger involved with a Central Banking System and a central government; he wanted the states to have more laws since he never “trusted the people involved with the federal government set up by Hamilton of course, a puppet for the bankers back in the late seventeen hundreds. Hamilton was doing the work for bankers of Europe as well as bankers in the states – he ws their messenger boy – later on , President Johnson warned the people of our country of the danger connected with our Federal government; Andrew Johnson was for the “common folk”; the others were aristocrats, he was not; he got elected by the common folk; the others did not allow the “common folk” the privilege of voting – they had no vote at all, only aristocrats, people with property could vote, Pres Johnson changed that of course!

  2. you’ll be right michael…i bought another 1000 shares in newcrest the other day at $A10.00 to dollar average the existing N/Crest i have …most gold shares are oversold and like the Auck. housing mkt it’s all about supply and demand…most of this current plunge in price has been manipulated by the big boys to meet demands on gold futures they’ve sold on gold that actually isn’t even above ground…keep your powder dry although oceana is only a minnow but you’ll be drinking bubbly before you’re 80 🙂

  3. Good news is hard to find right now. That doesn’t change the fundamentals, of which most investors are clueless. Nine hundred an ounce gold, here we come.

  4. As a small investor in Oceana Gold, it’s good to get some positive news. What you are saying makes sense. As long as there is a demand for gold it will have to be met by supply. However, as you so rightly point out, if price does not meet cost, then it’s common sense producers will stop producing. In fact Oceana have already made a move in that direction. At 76 though, I hope it doesn’t take too long to get back up!!

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