Gold Will Soar to $8000 as We Return to the 1970's Style Inflation

May 09, 2017

By Peter Ginelli : originally published in The Market Oracle

In 1977 I started my first year in college. Our newly elected president Jimmy Carter, had been sworn into office just a short time earlier and things were pretty normal. America was still trying to put President Nixon and Ford's Watergate era behind and start fresh with a newly elected president who had no connection with that national scandal. Much like today with the election of president Donald Trump, the American people were filled with hope that Jimmy Carter will bring in the much needed change after a long period of uncertainty and national crisis.

But it wasn't long before the storm came and many Americans saw their wealth destroyed by irresponsible public and financial policies of our leaders. After the OPEC oil embargo and Iranian revolution and the subsequent hostage crisis, the American economy fell into hard times as inflation began to rise at an alarming rate and the Federal Reserve began to raise rates to fight it with little success.

By 1980, millions of Americans had lost their jobs as unemployment reached above 10% and the rate of inflation had soared to 14%. To fight the rising inflation, the FED continued to raise rates to historic levels. Meantime due to the terrible economic condition and the ongoing Iranian hostage crisis, Jimmy Carter lost his re-election bid to president Ronald Reagan in 1981.

By 1982, the interest rates would reach an astronomical 21% to combat the soaring inflation before they were finally able to bring it slowly under control and the rates ultimately went back to normal.

Why, you ask, I'm giving you a history lesson? I'm convinced we are headed to the same direction in 2017, almost 40 years later, with only one exception.

This time when inflation starts to show its ugly face, and believe me, it will, they won't be able to fight it by raising rates as they did in the late 70's and early 80's! Why? Well, this is where that little exception comes into play. You see, back then, we didn't have a $20 trillion dollar national debt to pay back with interest, today we do.

Once inflation starts to soar, if the FED tries to raise rates only to 10%, just half of what it was back then, the interest on our national debt will climb to $2 trillion a year, Folks, there is a name for such a scenario, it's called "Massive debt crisis," much like today's Greece debt crisis.

So how will they fight it? In short, they can't. Why is that important to you? It's not a matter of if, but when, we are faced with this unavoidable national crisis. We can see the iceberg and the ship is headed straight towards it without a chance to avoid a head-on collision. And yet, we are sitting on the deck of this debt Titanic, listening to our leaders on how things will be different this time around and that you have nothing to worry about.

The saying goes, "Those who don't know history, are doomed to repeat it."

One other thing strikes me about that era. When Jimmy Carter won the election in November of 1976, an ounce of gold was only worth $138 per ounce, by 1980, that ounce of gold had increased in value to $850 per ounce. That is over 600% increase in just 4 short years. You don't believe me? Look it up for yourself. It happened!

If we use that model and apply it to today's gold price at $1230, gold would have to go up to $7380 per ounce, but let me once again remind you of that little exception between today and back then. This time the FED won't have the luxury of raising rates to fight the soaring inflation. Indeed, this time it WILL be different. In fact based on the current market trajectory, I believe it will be modest to project gold at $8000 an ounce and beyond, before someone puts an end to our leaders' irresponsible fiscal behavior and put some sanity in the system.

One final thing you should look into, and that is, how billionaires become billionaires. If you study them closely, you will quickly discover that no billionaire has ever accumulated great wealth by being reactive to national, world or financial events. What separates them from the masses, is that they are proactive and see it coming before the rest of us do.

So that begs the following question: What do billionaires like Stanley Druckenmiller, David Einhorn, john Paulson, George Soros, Jim Rogers and Paul Singer see today that the rest of the population doesn't see? After all, between them, they have purchased tens of billions of dollars in precious metals in the recent months. Even president Trump himself who is a billionaire has admitted to owning gold. The question is, why?

These people and others like them, buy the best advice money can buy, and they have been accumulating an enormous amount of gold. Maybe it's time the rest of us wake up and start following the smart money, rather than hope for the best. Maybe it would be prudent to stop drinking Kool-Aid and prepare for what could be one of the worst periods in our nation's history that is approaching at an alarming speed.

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