Gold glitters brightly at start of 2008

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Waving the old year goodbye with a few new records under the belt is no mean feat, but the real glitter for gold bullion is that most indicators seem to point to more good news down the line.

The first record is that the gold price recorded its first ever month-end close above $800 on Monday, December 31. As mentioned in my blog post “Gold bullion – a belated Christmas gift” (December 27, 2007), gold had only closed above this level on two days during its 1980 surge, namely: $830 on January 18 and $850 on January 21. However, the end of January 1980 saw the price significantly lower at $659.

Looking at monthly averages, January 1980 was $675. This figure was equaled in May 2006 and exceeded for the first time in April 2007. A new record of $806 was established in November 2007, whereas December’s average was slightly lower at $802. 

It is, of course, true that in inflation-adjusted terms the gold price is still a long way off its euphoric days of 1980. If adjusted for movements in the US consumer price index, the $850 record would today be around $2 250 and the average for January 1980 around $1 790.

Real gold price* (January 1971 to October 2007)
fullermoney-london-spct-gold-1.gif

*Monthly averages revalued to Q3 2007 prices. (Gold price deflated by seasonally adjusted US consumer price index.)
Source: World Gold Council

More importantly, the gold price is not only making headway in US dollar terms, but also in most major (and minor) currencies. This is a manifestation of increased investment demand, whereas the initial rise in the gold price from its low in 2001 ($250) until the middle of 2005 was mostly a reflection of US dollar weakness. The World Gold Council reports that identifiable investment demand during the third quarter of 2007 was nearly double year-earlier levels in tonnage terms.

Further to the table published in my previous article, gold has now entered record territory in terms of most currencies other than the US dollar. This includes the currencies of the two largest consumers of gold, namely the Indian rupee and the Chinese renminbi as illustrated below. (China has just overtaken the US as the second largest gold consumer after India, according to the World Gold Council.)

Gold in Indian rupee

rupee.jpg

Source: Fullermoney.com

Gold in Chinese renminbi

renminbi.jpg

Source: Fullermoney.com

Other central banks pursuing a policy of increasing their gold reserves relative to fiat currencies include Russia and Saudi Arabia. The following charts show the gold price in their respective currencies:   

Gold in Russian ruble

ruble.jpg

Source: Fullermoney.com

Gold in Saudi riyal

riyal.jpg

Source: Fullermoney.com

I have debated the fundamental case for investing in gold on a number of previous occasions, but let’s recap the implications of the inflation/deflation scenario by means of an excerpt from Richard Russell’s Dow Theory Letters. (I should add that he has been reading the gold cycle with painstaking accuracy.)  

Russell says: “… the Fed is fighting the potential forces of deflation. What deflation? Deflating home prices, a potential decline in consumer spending, plus the specter of rising unemployment. … let’s say that in 2008 the economy turns ‘bad’. In that case, the Fed will step on the accelerator and fight the downturn with everything at its command, which … means expanding liquidity and declining short rates. … the ideal atmosphere for a rising price of gold.”

Examining the opposite side of the coin, he argues: “Let’s say that the US economy stabilizes. The housing situation hits bottom and begins to improve. Business realizes that the worst is over for banking and housing – the economy is starting to recover. In the face of this, all the Fed’s previous monetary machinations begin to ‘kick in’. Under those conditions, gold is again advancing. All the money that was created during 2007 to counteract recession now acts as an ‘overflowing punch bowl’. The global economy is ‘on fire’. Under these conditions, gold heads sharply higher.”

The one situation that could be bad for gold is when deflation takes over and there is a panic for cash in order to stave off bankruptcy. A variety of assets, including gold, would then be sold in order to raise dollars. But this state of affairs is rather unlikely while central banks are at liberty to create money out of thin air.

I cannot help but conclude that we have not yet seen the last of the yellow metal’s new records and that more excitement lies ahead. For starters, I will not be holding my breath for the all-time high of $850 to be breached. After all, platinum, which often leads gold higher, has already recently recorded an historic high in US dollar.

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9 comments to Gold glitters brightly at start of 2008

  • sevenmmm

    Even in the panic for cash, those who need to raise cash have no gold to sell. After all, being smart enough to have purchased gold over the last decade should have resulted in a good financial situation.

  • lenny

    Thanks for the interesting post and keep up the good work. The more we reach, the better. Spread the news. Spread the wealth. Spread the gold and silver.

    take care,

    lenny

  • With short term rates below the level of inflation, strength in the price of gold should be bought!!!! The data shows this…..

  • Thanks for sharing this interesting commentary with us. In return, I’d like to add this to the above statement “The global economy is ‘on fire’.”

    Perhaps we should think of governments to be like fire, too!

    We all have fire in our homes. Under OUR control, it heats water, heats the house, and cooks our food. This makes us comfortable. But when fire gets out of control, it consumes the entire home and everything is lost, sometimes our lives. Fire does NOT control itself.

    So goes government. A reasonable amount of it makes everyone fairly comfortable. But it also does NOT control itself. And when it gets out of control, it will consume the nation. And we lose everything, including our lives.

    So we’ve got to try keeping our government under the general public’s control.

    You have shown that gold is a good “thermostat! Thank you.

  • [...] Goldpreises im Blog Investment Postcards from Cape Town an. Auch ein Blick auf die ausgezeichnete Analyse von Prieur du Plessis zur Goldhausse lohnt [...]

  • …Mit mehr als 30% Gewinn allein im Jahr 2007 glänzt Gold das sechste Jahr in Folge.

    Kurzer Rückblick und Augenblick

    Blicken wir kurz zurück: Im Jahr 2002 begann der Goldpreis seine aktuelle langjährige Rallye. Der Januar 2002 markierte noch ein Tief von 252 US$…

    …Ein Bild sagt mehr als tausend Worte. Schauen Sie sich dazu den Chart des inflationsangepassten Goldpreises im Blog Investment Postcards from Cape Town an. Auch ein Blick auf die ausgezeichnete Analyse von Prieur du Plessis zur Goldhausse lohnt sich.

    Thank you so much for your excellent commentary.

  • joey

    excellent article.

    many thanks.

  • I’m quite worried about this as it signals the overall lack of faith in the stability of world economies with investors retreating to the safety of hands-on property. I do understand where they’re coming from, but hope they’re wrong.

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