Veteran Investor Afraid Gold Will Hit $10,000

The U.S. is facing a severe debt crisis, and one veteran investor believes the only solution will be one that we’ve already seen before. Rick Rule believes that the U.S. must inflate away the real value of its obligations. The President and CEO of Rule Investment Media compared the current situation to the 1970s. Inflation was used as a tool to manage debt and commodities such as gold thrived. He sees a similar environment developing now, so is it unrealistic to think the U.S. would use the same strategy it already used before?

'I don't own gold because it might go from US$2,600 to US$3,000. I own it because I'm afraid it will go to US$10,000.' - Rick Rule

Is this prediction preposterous, or is it laughably conservative? From 1970 to January 1980, gold increased in price roughly 24 times. From 2001 to 2011, gold went about 7 times higher. For gold to reach $10,000 per ounce, that would only be a 3.8X rise from the current price. With the debt growing higher and faster than ever, will inflation be worse or much better than it was in the past?

Rule said that while the U.S. will honour its debt obligations in name, the value of those repayments will be reduced by inflation over time. This is exactly what happened decades ago. 'We faced this kind of situation, although it wasn’t as severe, in the 1970s,' Rule said during an interview with Kitco News anchor Jeremy Szafron at the New Orleans Investment Conference. 'We’ll fulfil the nominal value of our obligations, but inflation will quietly strip away their real value.'

A Debt Crisis Rooted in Inflation

Rule also noted that the scale of today’s debt is alarming. The nation’s deficit has rocketed by a trillion dollars in just a few months. It is catching the layman’s eye as being unsustainable. The inflationary policies of the 70s eroded the Dollar’s purchasing power by 75% and it should be no surprise that gold prices skyrocketed from $35 an ounce to $850 an ounce at the same time. The term ‘kicking the can down the road’ is often used by U.S. politicians to describe how debt is dealt with. It seems like a fitting analogy still as there doesn’t seem to be any other option. Countries like China seem to suspect this as well, as they have been hoarding gold and ditching U.S. investments.

'It’s no coincidence that inflation and gold’s rise went hand in hand,' Rule explained. 'Inflating away our debt seems like the only realistic path forward, and that’s why I believe gold prices could soar again.'

Another often ignored aspect of increased liquidity in markets is its diminishing returns. Imagine a swimming pool that needs to be filled up slightly. That would not be difficult to do with a garden hose. But, once that pool gets larger and larger, it starts to become difficult. Eventually, if someone is trying to fill up something the size of an ocean, they need a lot more liquid than what a garden hose can provide.

Our global money pool is the same. Countries used to be able to stimulate their economies by creating 1 billion dollars. Then it became trillions just to slightly move the needle. If countries want to stimulate their economies this time, they may have to create much more money than has ever been created before. Put simply, inflation the world has never seen before.

The Illusion of Economic Strength

Rule acknowledged that the U.S. economy appears robust on the surface, thanks to easy access to credit. He also warned that this model is unsustainable and leaves many individuals and households behind. Rule mentioned that if someone has access to credit and uses it correctly, the economy looks spectacular.  But those who have neither see a fragile economy that is unsustainable. Some other analysts have referred to this as a credit-based feudal system, in which those with access to lower interest rates naturally get the advantage over those who are forced to pay more.

Why Gold Could Quadruple

Despite gold’s strong performance in recent years, Rule sees more potential for the precious metal. He pointed out that gold and other metals currently represent only a fraction of U.S. investment portfolios compared to historical levels. If gold’s market share were to return to its historical average, demand could increase dramatically.

'Gold doesn’t need to beat the U.S. dollar or topple the Treasury market,' Rule said. 'It just needs to return to its historical share of the market. That alone would quadruple demand, and the impact on prices would be extraordinary.'

He added that gold remains overlooked as an investment or savings tool by 99.5% of the U.S. market. This lack of participation, he believes, presents a massive opportunity for growth.