Observations About the Gold Price Rally
With Gold soaring past $530 now, its highest level for a quarter century, some interesting things should be noted.
First, this increase have happened during a time when the dollar have risen against other mayor currencies. Usually there is a negative correlation between the dollar price of gold and the exchange value of the dollar versus the euro and the yen. But now gold have risen in price against virtually all currencies except the Brazilian real. While the gold price in dollars have risen 20%, the price in euros have risen nearly 40% and the price in yen have risen more than 40%.
Another interesting thing to note is how this have been virtually ignored by the supply-side community. When gold prices fell in the late 1990s because of a combination of the increased foreign exchange value of the dollar and fears about central bank sales of gold, supply-siders like Larry Kudlow, Steve Forbes and Jude Wanniski went hysterical about the Fed's alleged "deflationary" monetary policy and demanded that the Fed inflated more. That's right, they called Fed policy "deflationary" at the height of the stock-market bubble when money supply was growing at double digit levels, using the then falling gold price as evidence.
Yet for some reason, I have yet to find a NRO article advocating a "tighter" monetary policy.
This despite the fact that Larry Kudlow as late as August this year wrote that "Should gold break out of its range and move, say to $450 to $500, that would suggest inflationary liquidity should be removed by additional Fed reserve-draining and rate-hiking actions. ". Now Gold is at $530, Larry....
What then are the prospects for the gold price? The argument against gold was summarized in a recent The Economist article denouncing "the barbaric relic". Yet with short-term interest rates around zero in most countries and with the risk that central banks will try to accelerate inflation to bail out governments and households from their record debt burden, gold seems like a good inflation hedge. And some "emerging economy" central banks have been considering increasing its gold reserves, most notably Russia, who have said it considers buying 500 tonnes (16 million ounces, at a price tag of $8.5 billion at current price) of gold.
While some form of short-term correction is possible -indeed likely- after the recent sharp rise, it therefore seems likely that gold could continue to rise until central banks is able to rein in inflationary expectations-or if they in an effort to attack the symptom rather than the disease try to supress gold prices with large-scale sales of gold reserves.
Comments (16)
The gold climb seems to be a signal that we are entering a new phase of price inflation, especially when you consider that silver, platinum (over $1,000), copper (All time highs), oil, orange juice (7 year high)and housing prices are all in bull markets.
Published: December 10, 2005 12:30 PM
"large-scale sales of gold reserve"
Wouldn't that be nice!
Unfortunately for the banks, there may not be that much reserve left. Anyone with information on how this is affecting gold lease transactions?
Published: December 10, 2005 3:08 PM
The rising price of the precious metal is stimulating further mining growth. Generally the higher the gold price is then the keener that people are to look for more gold.
Published: December 10, 2005 7:02 PM
Although gold is scaling record hight, it is a vulnerable investment option in long term.
75 % of gold demand is for jewellary, 13 % for industrial consumption and balance 13 % as investment option. The cart is too heavily loaded on one side.
A drop in jewallary consumption, and the price will tumble. Although in short term, so long as everyone is running to the loaded side, it seems safe.
Published: December 11, 2005 5:15 AM
Perhaps jewellery is not subject to so much fluctuation, after all...? Some acquaintances of mine, jewellers, managed to flee the Pol-pot dictature in Cambodja, selling their diamonds, as it was one of the few things still worth anything during the revolution.
Personally I have been more impressed by the value of gold mine shares the last years. I'm still quite uneasy about central banks selling off reserves though.
Published: December 11, 2005 6:11 AM
My guess is that, in a few months, the housing market will keep slowing down, and eventually, crash. Everyone will be screaming, "Oh my God! Oh my God! We thought the market was just going to slow down, but it's a crash! Save us, Bernanke! Save us!"
Bernanke will appear in the sky, his cape blowing in the wind, and he will proclaim, "Never fear, for the Fed is here!" He'll roll back his sleeves, fly over to his printing press, and switch the dial from "high" to "full power".
At first, the market will rejoice and respond by buying stocks, because they think it's time for another bull market. But wait! There's a problem: Those god damned lenders are adding an inflation premium to their interest rates! High interest rates mean no boom and high money supply growth means prices keep rising. Eventually, the market will realize that we've entered an inflationary recession (a.k.a. stagflation), and they'll start buying gold as an inflation hedge.
Published: December 11, 2005 11:37 AM
Blah,
Very funny! And it could pan out just that way.
Published: December 11, 2005 9:04 PM
Blah, I also found that post quite amusing. This blog could do with a bit more humor considering the desperate situation.
The question is, will we even be allowed to own gold.
Published: December 13, 2005 3:05 PM
anarkhos,
Your fears are well-founded:
http://www.usagold.com/cpm/Hoppe.html
Published: December 13, 2005 5:57 PM
I find it very difficult to believe that the huge fall in the USD price of gold from 1980 until recent years was simply due to "a combination of the increased foreign exchange value of the dollar and fears about central bank sales of gold". We are talking about a fall from $850 dollars per ounce in 1980 to about $260 in 1999. And that's not even counting the fall in purchasing power of the dollar over those 19 years.
Everywhere in the world a dollar in 1999 had less purchasing power than a dollar in 1980.
Published: December 14, 2005 7:50 AM
Marco, I wasn't refering to the 1980-81 decline in gold from its brief $850 dollar peak. I was refering to the decline in the late 1990s from the $350-400 range in the mid-1990s to the $250 low in 1999.
Published: December 14, 2005 3:23 PM
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Published: February 25, 2006 3:52 PM
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Published: April 9, 2006 3:55 PM
I just found a rather interesting article on what forms money could take in the future: http://www.rfreitas.com/Nano/TangibleNanomoney.htm.
Published: April 10, 2006 7:03 AM
Have you ever heard that Russian alchemists have found a way to manufacture gold from lead at a cost of 400-600$ an ounce? They have never done it before because the manufacturing cost was too high. However, at today’s gold prices they are making a killing! What do you think?
Published: November 8, 2007 10:19 PM
It is 2008 Feb, the gold price is 900 U.S$ ++ and no sight of it stabilizing even at 1,000 U.S$. However, there is one trend that should keep the prices in check to a modest extent. Jewelry buyers have now shifted their purchases to silver jewelry. This will ease the strain that gold prices feel to a certain extent. The increasing demand for wholesale silver jewelry was felt by all jewelry sellers, in Europe and U.S. However, jewelers are braving for a at least a single stretch jump touch to 1,000 U.S$ within the year 2008.
Published: February 3, 2008 2:18 AM