Wednesday, September 16, 2009


Gold Closes at Record Highs

CNNMoney reports:
Gold prices settled at an all-time high Wednesday as the dollar slumped and inflation concerns boosted demand for the metal as a hedge against rising prices.

Gold for December delivery jumped $13.90 to close at a record high of $1,020.20 an ounce, well above the previous high of $1,003.20 that was posted March 18, 2008.

The dollar fell to a one-year low against a basket of currencies, as upbeat economic data boosted optimism about the global economic recovery and gave investors an appetite for more risky assets, such as stocks.

Mark Hansen, director of trading at commodities research firm CPM Group, said the weak dollar is the "main driver" of Wednesday's gold rally.

At the same time, gold prices are being supported by concerns that government efforts to stimulate the economy could result in a bout of inflation a few years from now. "That has given investors more of an appetite for tangible assets," Hansen said.

The inflation concerns come despite a government report that showed consumer prices remained relatively tame last month.

The Labor Department's Consumer Price Index rose 0.4% in August from the month before due to higher energy prices. Over the past 12 months, CPI has declined 1.5%.

"Because inflation is really not an issue now, investors are looking out a year or two and wondering what happens if there's not a timely withdrawal," of economic stimulus dollars, Hansen said.

Investors view gold as a hedge against rising prices because tangible assets tend to hold value better than equity-based assets when inflation is an issue.

Looking ahead, gold prices could head even higher, Hansen said.

Market participants have become "more comfortable" with gold prices above $1,000 and that has "emboldened investors to think that market can go higher," he said.
As long-time Free Advice readers know, the parts in bold above are quotes that I consider to be dumb. Note that I'm not saying there's a conspiracy here. I think a few writers say, "0.4% inflation in one month is tame" and then everybody else follows suit. A guy trying to make his deadline isn't going to pull out a calculator and say, "Wait a second, that's 4.9% a year! We're saying that's tame inflation? Did I miss something? Have we always been at war with Eastasia?"

Is it @ record highs? When you adjust gold using the CPI, Jan 1980 is about $2500. We're not even close... yet. This is one of the most interesting things about the gold standard discussion. Gold has not been keeping up with inflation. At that time in 1980, the Hunt Brothers were manipulating the silver price. I was working for a film manufacturer at the time and we were adjusting prices every week for our entire product line... by hand... and then they were keypunched... at least we had calculators for those times and could burn through the price calcs for a few hundred products.

I calc'd today's CPI since Dec 2008 and I get us running at a annualized rate of 4.57%. If the CPI stays where it is at this latest report, it won't be until November that the BLS press release will show a positive year-year comparison.
As the coming three months drop out of the lagging 12 month average, you will see the year over year number increase dramtically. Seeing a 4 to 5% rate of inflation in the CPI tells me that something is either seriously out of whack with the bond market, or the people buying bonds know the inflation can't last. Someone is terribly, terribly wrong in their predictions.
I don't think many people are buying bonds right now. I think the Fed is picking up the lions share of the bonds and we are just one or two major events away from the dollar dropping like a stone.

I just wonder if people will start running towards bonds like last year when the markets begin to correct. That might create a pull back in gold, but I can't imagine that there are many investors left that haven't ran to the dollar already. More and more people are going into gold, but when all the people holding dollars realize their mistake, gold will really take off. At some point the market will fall with the dollar and everyone will be wishing they owned gold and silver.
Here's a chart showing the price of gold in a number of different currencies (including US$). Gold price in yen, Euro, A$ is flatlining. Only US$ price is going up. Surely this means not that gold is going up, but the dollar is going down?
I checked my calc again and made a small error.... YTD annualized CPI is 4.0%. Still bad, less bad, still little reported by the news media...
I agree with Marc Sheffner somewhat. The dollar is going down.

But for the past few years, the trend is that gold IS rising priced in other currencies as well. I was wondering when other governments would give up trying to maintain currency pegs as the dollar worsened. Maybe it's happening a little bit now?

I think the real story isn't gold but that the dollar is falling relative to other exchange media. I expect that to continue and get worse, based on current information.

Considering the garbage the US government wants to fund (see health care, social security and countless military bases and wars,) am I wrong for hoping for a default or the dollar experiencing extended turmoil?
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