T Nation

Gold Over $800 Per Ounce


Falling dollar could push gold to record high
By Javier Blas and Chris Flood

Published: October 30 2007 20:23 | Last updated: October 30 2007 20:23

For a moment this week, it looked as if a sliding dollar and surging oil prices would drive gold through $800 dollars an ounce for the first time since 1980.

Precious metals traders say that a move above this psychologically important level and towards the nominal record high of $850 an ounce reached in January 1980 is likely if an expected cut in interest rates today by the US Federal Reserve leads to further dollar weakness.

But gold is also used as a hedge against inflation and the metal is partly seeing demand boosted by fears that global inflationary pressures are building �?? a concern that becomes ever more intense as oil approaches $100 a barrel."


With gold > $800, oil near $100, foreclosures skyrocketing, and the S&P 500 price-earnings ratio very high, I think we're screwed. Thoughts, anyone?


Yep! It won't be long now until the rest of the world starts trading dollars for the Yuan.


Warren Buffet not confident about the dollar.



Will it hit $1000? $1500? If investors around the world begin believing that we are out to seriously debase our currency, look out below for the dollar and above for gold.


If we were on a gold standard this would be a good thing because our money would actually be worth more; however I seriously doubt gold would have gone this high if we were still on the gold standard.

The reason gold goes up is because other investors are losing confidence in the dollar and demanding more gold -- thus driving the price up.


The S&P 500 isn't going to be killed by the dollar -- too many companies are multi-nationals taking in as much foreign currency as dollars.

There will be a problem with a recession, but hopefully it will be relatively mild -- we're due for a cyclical pull back.

The devaluation of the dollar is problematic for the reasons that inflation is always problematic - and it will be inflation on consumers and businesses because we buy so many imports, which will all be more expensive. The dollar devaluation is one of the most worrisome things going on right now - definitely one of the major drivers in the price of oil. Though, Lifticus, I don't foresee a massive Yuan holding unless that currency is actually floated - and I don't see that happening, given what it would do to the Chinese export market.


On the other hand, devaluation of the dollar might also increase American exports via lower prices, no?


Yes, it will - but it doesn't help the consumer's purchasing power. And to the extent devaluation undermines the dollar as the world's fallback currency or discourages foreign investment in U.S. government debt, it would be very bad indeed...


In 1971, an ounce of gold was $35 and oil was $2 a barrel.

The dollar is a currency undergoing a serious debasement. I don't know if the conspiracy theorists are correct or if its just a mad process, but this country is in for one gigantic long-term shitstorm.

Our country will be a radically different place 20 years from now.


No they won't. Since our dollar is worth less it costs more to produce here so production will go down thus driving prices up overseas.


Bull market just getting started:

"John Hathaway, the portfolio manager of the $1.128bn (£541m, �?�778m) Tocqueville Gold Fund in New York, had a total return of 38.2 per cent from October of 2006 to September of this year. Not bad, but, as he says, "It's all performance, not money flows." Over that time, new purchases of fund shares were $330m, while withdrawals were $280m, for a net inflow of $50m. If the public had really bought into this bull market story, then we would be looking at something better than annual net inflows of 5-6 per cent.

As a precious metals hedge fund manager points out: "Implied volatility for one month gold is around 20 per cent. Back in the real bull market of 1980, it was up to 50 and 60 per cent. Silver vol was over 100 per cent in 1980. You have this clinical signal that the bull market hasn't started yet."



This is not true. Farmers make a killing when the dollar is low. Lower dollars means higher foreign competition.

Folks need to get a grip. The gold market of the 80's makes this look like pre-schoolers.

Anyone ever hear of cycles?

How much of this is wishful thinking, and how much of it is real concern. Of course the gold fund guys are going to try and make this a bull market. The henny-penny's of the world will see to it that the price runs up and the gold guys make a killing.

Not much different than the commodities markets. It's called speculation in Chicago - not investing.


Every devaluation of the dollar makes production more expensive which drives production down. They make a killing because prices go up overseas...eventually they come back down once production goes back up. This is called the business cycle and it is caused by credit expansion. This is bad because it hurts the average American's ability to purchase goods disproportionately among marginal wage earners. Credit expansion is stealing.


Lifty, I'm not quite sure I understand what you're saying.

The "devaluation" of the dollar in the near term has to do primarily with currency markets. Since the dollar is increasingly cheap, american goods will be cheaper in foreign markets. But this means either higher prices fetched for american goods abroad in the short term, or expanded markets for those same goods in the longer term. Perhaps you're saying that this situation will be more than offset by increasingly expensive (again due to the unfavorable exchange rate) imported inputs/raw materials, such as oil?


Exactly. Initially, prices look good overseas in terms of exchange rates but as soon as we pick up production here in the US to meet demand prices actually go up because of the weaker dollar -- thus prices overseas need to be raised to offset the cost of production.

Add back in the fact that American consumers are the largest consumers in the world and you can see that the rest of the world will be affected by higher prices here.

In trade, when one entity is affected they all are affected. It might take some time to realize this in the market but eventually it catches on. For example, the reason why we are seeing the collapse of the housing market now is attributed to the credit expansion that happened from 2002 to 2006 under Greenspan. Planners are not able to foresee further into the future than the most immediate effects that some action might have. Bastiat warned against the unintended consequences of economic planning in "That Which Is Seen, That Which is Not Seen."

Here is a better explanation than I can give:

"In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause--it is seen. The others unfold in succession--they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference -- the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee."


For the time being, the market doesn't appear to be overly concerned with inflation - bond yields aren't very high, particularly given foreign investors are shifting assets to the dollar to get that yield.


Every country in history that tried to retain its position in the world by debasing its currency suffered some sort of collapse. If a 'junior partner' is there to keep the system running (Britain --- > USA), the pain is not too bad. If no one is there to maintain things (Roman Empire), the collapse is monumental and we get, not depression, but destitution.

Our hope is that China will be ready to maintain the world system when the time comes.


Orange you glad the Prudent Safe Harbor Fund is finally moving?


I doubt it. These things tend to smooth out over time, especially now with the increasing speed of globalization.


If the dollar is being debased (it is), this decreases the likelihood that overseas investors want to keep their assets in dollar-denominated securities. It therefore follows that the value of dollars, relative to other stonger currencies will fall. This is happening now. This means that the standard of living in the USA must fall --- the price of imports rises and domestic industries are more free to raise their prices as well. Our consumption falls since we cannot buy as much.

Consumers, as voters, then begin to scream at government to 'do something'. This leads to increased regulations, restrictions on capital flows, and possibly price controls (like Nixon did). The result is disaster. A run on the dollar ensues, banks fail left and right (its beginning now). The likelihood of a Great Depression, and a transfer of hegemony to China, ensues.