AGE Gold Commentary is our regular report analyzing trends in precious metals and rare coins. We monitor domestic and international markets and extrapolate from our 30 years in metals to place current events into a hard asset perspective. View archives.
4/22/2002: Important! Dollar declining, gold rising
This might be our most important gold market update in three years. Please read carefully.
Why gold will move higher - it's an ugly world out there.
US Dollar showing weakness - why this is important.
10-20% decline in US Dollar likely - based on 25 previous examples.
Making sense of the gold price - why dollar weakness will benefit gold!
Conservative recommendations - how to buy gold safely.
Gold is up about 10% in price in the last three months, from $277 to over $300. The gold market is starting to build a solid head of steam. Because of recent events, we believe that a substantial rise in the gold price is likely and perhaps imminent. We might be a bit premature in this prediction, but with a market as promising as this one, we'd rather be a month or two early than just one day late.
Why gold will move higher
You all know about our world at war, the accounting mess on Wall Street, our weakened U.S. economy, and the extremely high debt that consumers and corporations have amassed in the last several years. All of these key fundamentals are pressuring gold to move higher, and gold will surely respond. But the real key to unshackling the gold price is the U.S. dollar.
For several years now the dollar has usurped gold's traditional role as the worldwide currency of last resort. With the U.S. economy and the dollar so abnormally strong for so long, gold has been all but overlooked. Dazzled by the U.S. economic boom of the late 1990s, investors here and abroad chose U.S. stocks and the dollar as their investments of choice.
This absolute faith in our stock market and our greenback has now been severely shaken. We've been attacked and we're in recession. Foreign investors whose investments comprise approximately 30% of our stock market value, are wondering why they should continue to invest in U.S. stocks and finance our ballooning trade deficit. They are now beginning to change their investing ways and are losing their blind faith in the U.S. dollar and U.S. economy. Japanese investors in particular have been turning to gold instead, buying at a frenzied pace since the New Year.
US Dollar declines across board
Now the U.S. dollar is starting to decline, and as it declines gold will almost certainly rise in price, perhaps exponentially. We've been expecting this shift since we entered recession, and it finally seems to be occurring. If so, gold will move substantially higher and could easily break the $400 barrier, and soon.
The Financial Times of London reported last week that "the dollar weakened across the board on the foreign exchange markets on Thursday, rekindling hopes among long-standing bears that the U.S. currency might finally be poised to fall sharply."
The Times observes that although "there has been no obvious catalyst for the weakness of the dollar over the past few trading sessions, analysts said doubts were growing about the sustainability of the U.S. economic revival. The brief slowdown in growth last year did little to resolve imbalances in the U.S. economy, most notably a low savings ratio and a ballooning current account deficit. Many fear that these imbalances will soon start to constrain growth."
The brief slowdown in growth last year did little to resolve imbalances in the U.S. economy, most notably a low savings ratio and a ballooning current account deficit. Many fear that these imbalances will soon start to constrain growth."
Our current accounts deficit is a major problem, and presents huge threat to the dollar. Jim O'Neill, head of economics at Goldman Sachs, predicts it will reach 6% of GDP by 2004. "The current account deficit is becoming more of a burden, especially at a time when the outlook for returns on U.S. assets is less compelling than previously. The U.S. currency is now looking very vulnerable." Stephen Roach, chief economist at Morgan Stanley, thinks the current accounts deficit will grow even faster. In the Economist last month, Roach predicted that "by 2003 the deficit could reach a record 6% of GDP. Not only would that be the biggest deficit run by a G7 economy in the past 30 years, it also implies that America would need to raise from abroad an annual $660 billion, or $2 billion a day."
Stephen Roach, chief economist at Morgan Stanley, thinks the current accounts deficit will grow even faster. In the Economist last month, Roach predicted that "by 2003 the deficit could reach a record 6% of GDP. Not only would that be the biggest deficit run by a G7 economy in the past 30 years, it also implies that America would need to raise from abroad an annual $660 billion, or $2 billion a day."
You see, for every $1.06 we spend abroad we take in $1.00. This doesn't seem like much of a deficit until you multiply the six overspent cents by millions of transactions every day or trillions of transactions every year.
10-20% decline in US Dollar likely
What does it mean? It means the dollar is likely fall, probably 10% to 20% in value.
In a recent study, Caroline Freund of the Federal Reserve Bank analyzed 25 episodes in developed economies of large adjustments in the current-account deficit. She found that deficits usually began to reverse when they exceeded 5% of GDP. Such adjustments were typically accompanied by a 10-20% fall in the real exchange rate.
So the U.S. dollar may very well be on the verge of a 10-20% decline, on the basis of our runaway current accounts deficit alone. Now add the Middle East crisis, volatile energy prices, the expanding war on terrorism, and inflation. What a stew! The near-term prospects of the dollar look dismal indeed.
When the dollar declines, imports will become that much more expensive, stimulating inflation even further and perhaps forcing the Fed to raise interest rates. Such a decline will also signal a huge loss of international confidence in the currency (and the economy) that the world has relied upon almost exclusively for the last decade.
All these events are extremely bullish for gold.
Making sense of the gold price
Paul van Eeden, the renowned gold market analyst, wrote a special report last fall entitled "Making Sense of the Gold Price." In this compelling analysis, he makes a rock-solid case for a 30% increase in the gold price as the dollar slides from its unnatural heights.
The stage has been set for this dramatic gold increase for quite a while. Now the curtain appears to be rising, and the gold price is rising along with it, probably to the $400 level or higher. Gold has risen about 10% this year already, from a baseline of $277 to over $300 now. In the spring of 1993 gold ran from $328 an ounce to over $400 in just a few months. This time around the increase could be even more explosive.
Please take a few minutes to review Paul's excellent research report by visiting the Library at www.amergold.com and clicking on the link: Making Sense of the Gold Price
Inflation, world turmoil, higher energy prices, and terrorism are all news stories and all reasons why gold should and will go higher, much higher. By comparison, a falling dollar doesn't seem like much of a story, and probably won't get much news coverage. But the rise in gold prices that follow the dollar's decline will certainly be headline news. The market chasers will then pile into gold in earnest, and things will truly get interesting.
In 20 years we've never been more bullish on gold than we are right now! As your reliable hard asset advisor, we recommend aggressive purchases of gold now, before the events we're reporting affect the gold price substantially!
Please visit our web site at www.amergold.com for more information and our current offerings. Our specials, especially our Power Pairs, are a great deal right now!
Conservative recommendations for gold investors
If you get started now and add more gold to your existing position, you'll stand to gain the most when the market boils over.
1-oz. U.S. Gold Eagles
No IRS reporting requirements for these bullion coins.
British Sovereign "Kings" Brilliant Uncirculated
These are the best classic European gold coin for popularity, price, and scarcity.
$20 Liberty, in MS62-64 condition and $20 Saint-Gaudens, in MS63-65
These gorgeous, historic coins offer complete financial privacy, excellent leverage to the gold price, high collector and investor demand, and are still downright cheap today.
Prices are now moving up, but the big price increases are on the way. It's not too late to buy these classic U.S. gold coins near their 20-year lows.
Let me repeat, in 20 years we've never been more bullish on gold than we are today! We highly recommend aggressive purchases of gold now.
American Gold Exchange
AGE Gold Commentary
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