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/By Doug Casey/
Not surprisingly, gold’s steep correction has generated some concern
for
resource stock investors. So let’s take a look at the gold market.
I figure the metal "should" be worth something like $1,000 an ounce now
to be in a rough equilibrium with the value of other things the dollar
can buy. That’s an arbitrary guess; there’s no exact method I know of
to
determine gold’s real dollar value. If the U.S. dollar were sound,
there
would be a fixed amount of gold in the treasury for every dollar in
circulation; in the 19th century, a $20 note was a receipt for an ounce
of gold held on deposit, and a "dollar" was just a convenient name for
a
20th of an ounce of gold.
Today, of course, the relationship between the dollar and the amount of
gold the U.S. Government has to redeem it with is so tenuous that it’s
completely academic. But, assuming that the government were just to
make
good on dollars held by foreigners—forget about Americans—how high a
gold price might be needed?
First we need to know how many dollars are outside the U.S. Nobody
knows
exactly. They constitute the reserves of most foreign central banks and
the de-facto currency of record in dozens of countries for ordinary
citizens. The amounts are almost beyond belief; it’s said that, in
Moscow alone, there are more US$100 bills circulating than in the
entire
U.S. Could $5 trillion be the number? If so, and if there are the
reported 261 million ounces in the U.S. Treasury, the value of that
gold
comes to about $20,000 an ounce. Just to make good on the reported U.S.
trade deficit of $800 billion for the last year, we’re talking $3,000
gold. Forget about what the numbers would be if you added in the
domestic money supply, M-3. Especially since they don’t even publish it
anymore.
But the numbers, at this point, are academic. My basic view on gold is
unchanged. And the fact it had a 37% gain this year, reaching a peak of
$725 on May 12, or has given back 22% since then is meaningless in the
big scheme of things. As I’ve said before, before this market is over,
gold isn’t just going through the roof; it’s going to the moon. And the
market is by no means over. It’s just starting to wake up from a
generation-long slumber.
Why did it heat up the way it did? Perhaps the attention of the traders
was drawn to gold by Bush’s brinkmanship and buffoonery over Iran.
Perhaps it was people noticing that gold was a relative laggard among
the metals in this bull market. Perhaps the market was paying more
attention to the Russians and the Chinese, among others, divesting
dollars. There is solid evidence that dehedging by the producers helped
fuel the surprisingly strong rally, and that that dehedging is now
slowing.
Likely it was a confluence of these and other factors. Thousands of
hedge funds, most of which collect their 20% profits just to follow the
trend, piled in. As the herd took their positions—especially when the
short-term oriented traders had all bought—momentum slowed, and it went
into reverse.
Remember that most of these traders were toddlers the last time gold
got
anyone’s attention, back in the 1970s, and so they only know what
they’ve been taught—that gold is an anachronism, a valueless relic.
Consequently, they have almost no understanding of gold’s fundamentals.
Consider, for instance, a primary reason given for gold’s big
correction
is that higher interest rates will make gold a less attractive asset.
As
if there is some hard and fast rule that says gold can’t move up when
interest rates are rising. But that ignores the clear historical
precedence of the 1970s when interest rates were surging at the same
time as gold.
It’s unwise to try picking tops and bottoms in the market. But, the way
I see it, gold has made its bottom as you read this. The fundamentals
haven’t changed; there’s only been a swing in traders’ sentiments.
--
*DISCLAIMER: *All of the provided information is believed to be
accurate, however errors are possible. The opinions in the Commentary section
do not necessarily reflect the opinions of Swiss America and SavingAdvice.com. Past
performance of any investment is no guarantee of future performance. All
investments have risk.
Not surprisingly, gold’s steep correction has generated some concern
for
resource stock investors. So let’s take a look at the gold market.
I figure the metal "should" be worth something like $1,000 an ounce now
to be in a rough equilibrium with the value of other things the dollar
can buy. That’s an arbitrary guess; there’s no exact method I know of
to
determine gold’s real dollar value. If the U.S. dollar were sound,
there
would be a fixed amount of gold in the treasury for every dollar in
circulation; in the 19th century, a $20 note was a receipt for an ounce
of gold held on deposit, and a "dollar" was just a convenient name for
a
20th of an ounce of gold.
Today, of course, the relationship between the dollar and the amount of
gold the U.S. Government has to redeem it with is so tenuous that it’s
completely academic. But, assuming that the government were just to
make
good on dollars held by foreigners—forget about Americans—how high a
gold price might be needed?
First we need to know how many dollars are outside the U.S. Nobody
knows
exactly. They constitute the reserves of most foreign central banks and
the de-facto currency of record in dozens of countries for ordinary
citizens. The amounts are almost beyond belief; it’s said that, in
Moscow alone, there are more US$100 bills circulating than in the
entire
U.S. Could $5 trillion be the number? If so, and if there are the
reported 261 million ounces in the U.S. Treasury, the value of that
gold
comes to about $20,000 an ounce. Just to make good on the reported U.S.
trade deficit of $800 billion for the last year, we’re talking $3,000
gold. Forget about what the numbers would be if you added in the
domestic money supply, M-3. Especially since they don’t even publish it
anymore.
But the numbers, at this point, are academic. My basic view on gold is
unchanged. And the fact it had a 37% gain this year, reaching a peak of
$725 on May 12, or has given back 22% since then is meaningless in the
big scheme of things. As I’ve said before, before this market is over,
gold isn’t just going through the roof; it’s going to the moon. And the
market is by no means over. It’s just starting to wake up from a
generation-long slumber.
Why did it heat up the way it did? Perhaps the attention of the traders
was drawn to gold by Bush’s brinkmanship and buffoonery over Iran.
Perhaps it was people noticing that gold was a relative laggard among
the metals in this bull market. Perhaps the market was paying more
attention to the Russians and the Chinese, among others, divesting
dollars. There is solid evidence that dehedging by the producers helped
fuel the surprisingly strong rally, and that that dehedging is now
slowing.
Likely it was a confluence of these and other factors. Thousands of
hedge funds, most of which collect their 20% profits just to follow the
trend, piled in. As the herd took their positions—especially when the
short-term oriented traders had all bought—momentum slowed, and it went
into reverse.
Remember that most of these traders were toddlers the last time gold
got
anyone’s attention, back in the 1970s, and so they only know what
they’ve been taught—that gold is an anachronism, a valueless relic.
Consequently, they have almost no understanding of gold’s fundamentals.
Consider, for instance, a primary reason given for gold’s big
correction
is that higher interest rates will make gold a less attractive asset.
As
if there is some hard and fast rule that says gold can’t move up when
interest rates are rising. But that ignores the clear historical
precedence of the 1970s when interest rates were surging at the same
time as gold.
It’s unwise to try picking tops and bottoms in the market. But, the way
I see it, gold has made its bottom as you read this. The fundamentals
haven’t changed; there’s only been a swing in traders’ sentiments.
--
*DISCLAIMER: *All of the provided information is believed to be
accurate, however errors are possible. The opinions in the Commentary section
do not necessarily reflect the opinions of Swiss America and SavingAdvice.com. Past
performance of any investment is no guarantee of future performance. All
investments have risk.
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