Will Gold Reach US $ 2000 ?
A Little Learning Is A Dangerous Thing
Gold’s rally to a record means prices are still 53 percent below the 1980 inflation - Adjusted peak. While gold rose 19 percent this year to $1,072 an ounce on Oct. 14, consumer prices almost tripled in the past three decades, eroding the metal’s value. Bullion hasn’t kept pace with the cost of bread, fuel or medical care. In 1980, gold hit a then - Record $873 an ounce. In today’s dollars, that would be $2,287, according to the U.S. Labor Department’s inflation calculator.
Record government debt and interest rates close to zero percent are pushing gold higher for a ninth straight year, and options show investors expect the rally to continue. When prices reached all - time highs, the contract with the most open interest was the December call to buy the metal at $1,200. The contract to purchase at $1,500 an ounce was the third biggest.
The U.S. Dollar Index, which measures the currency against those of six major trading partners, fell on Oct. 15 to the lowest level in 14 months, and has dropped about 7 percent this year. President Barack Obama has increased the nation’s marketable debt 22 percent to $7.01 trillion to revive growth.
Preserving Value :
Gold bulls say today’s record borrowing and low interest rates mean the government will have to accept faster inflation as the economy recovers. Investors buy bullion to preserve value during times of turmoil and economic stress.
Financial institutions worldwide have reported credit losses and write downs of about $1.62 trillion since the start of 2007, when the credit crisis began. Group of 20 governments have pledged about $11.9 trillion to ease credit and revive economic growth, according to the International Monetary Fund.
“Gold is Hedge against currency devaluation”, John Brynjolfsson, of Hedge fund Armored Wolf LLC, said in A Bloomberg Television interview from Aliso Viejo, California, on Oct.7. He predicted bullion will top $2,000. Banks have raised their gold estimates. On Oct. 9, JP Morgan Chase & Co. said the metal will Average $1,006 an ounce next year, Compared with an earlier projection of $950. Deutsche Bank AG Forecast An Average of $1,150, up 32 percent from its estimate in July. Barclays Capital said Oct. 12 that “prospects for a run at $1,500 should not be underestimated”, Next year.
Understated CPI :
Gold would need to rise more than sixfold to top the 1980 record, using a more accurate inflation - Adjustment, said John Williams, an economist and the editor of Berkeley, California - Based Shadowstats.com. He said the government has understated the cost of living over the past two decades with adjustments in the way it measures the basket of goods and services monitored by the U.S. consumer price index, or CPI.
“If the methodologies of measuring inflation in 1980 had been kept intact, gold would have to hit $7,150 to be the equivalent of the 1980 record”, Williams said. The cost of living in the U.S. rose 0.2 percent last month, the Labor Department said on Oct. 16. Compared with a year earlier, consumer prices fell 1.3 percent. The CPI will drop 0.5 percent this year, before rising 1.9 percent in 2010, reflected by the median estimates of 61 economists in a Bloomberg survey.
Annual increases averaged 2.8 percent a year in the past decade.
Purchasing - Power Adjustment:
Since January 1980, the average price of a pound of white bread has risen almost threefold, from about 50 cents to $1.38 in August, and medical care has surged more than fivefold, Labor Department figures show. Gasoline and electricity prices have more than doubled.
Today, the gap between gold’s spot price and its CPI - Adjusted equivalent is the widest ever. Gold hasn’t been as effective a hedge against inflation as oil since the 1980s, said Matt Zeman, of LaSalle Futures Group LLC in Chicago.
Oil Beats Gold :
Crude passed its 1981 inflation - Adjusted record two years ago. The cost of imported oil averaged $39 a barrel in February 1981, after Iran cut exports, according to the Energy Department. That’s $89 in 2007 dollars, the Labor Department calculator shows. Oil reached a record $147.27 on July 11, 2008, and closed at $78.53 on Oct. 16 in New York trading.
“If you bought gold in the 1980s, you’re still losing money today,” said Zeman, a metals trader. Gold prices in New York languished for two decades after declining from the 1980 record, dropping to a 20 - Year low of $253.20 on July 20, 1999.
The Federal Reserve may limit gains by raising interest rates before inflation balloons, analysts said. Fed Chairman Ben S. Bernanke said on Oct. 8 that policy makers will need to raise interest rates “at Some Point” to control inflation.
‘Prepared to Tighten’ :
“When the economic outlook has improved sufficiently, we will be prepared to tighten,” Bernanke said in remarks prepared for an Oct. 8 conference in Washington. Fed moves to cool inflation and the government’s revenue needs will stop gold, according to Jon Nadler, a senior analyst for Montreal metals dealer and refiner Kitco Inc.
Gold Producers :
The Philadelphia Stock Exchange Gold & Silver Index jumped 43 percent this year, as Phoenix - Based Freeport - McMoRan Copper & Gold Inc. tripled. Toronto-based Barrick Gold Corp. The world’s largest producer, fell 10 percent. Barrick said Sept 8 it will record $5.6 billion in third - Quarter costs to eliminate fixed - Price contracts as the company bets gold’s value will climb.
At Jersey, Channel Islands - Based GoldMoney.com, which held $759 million of gold and silver for investors as of Sept 30, founder James Turk said bullion can climb eightfold based on the historical Relationship between the metal and the Dow Jones Industrial Average. The Dow is up 10 - Fold since January 1980.
Gold and the Dow, which has gained 14 percent this year to 9,995.91, were at about the same level during the Great Depression and the early 1980s, he said On Jan 21, 1980, as gold futures surged to $873, the Dow slipped to 946.25. “The dollar is constantly being debased and inflated”, Turk said “By 2013, gold is going to be at $8,000 and the Dow will be at 8,000”.
Gold - Dollar Link :
Deutsche Bank said early this month that the dollar will fall to $1.60 per euro next year, a drop of 7.3 percent from last week, because of “rising fiscal deficits and loose monetary policy.”
Gold has moved in the opposite direction of the dollar over most of the past decade. The metal’s correlation coefficient to the U.S. Dollar Index is minus 0.8539, Bloomberg data show. A correlation of minus 1 indicates two assets move inversely to each other, while a 1 would show they move in tandem. A reading of zero shows no correlation.
Philip Gotthelf, the president of Equidex Brokerage Group Inc. In Closter, New Jersey, says he expects gold to trade at $1,250 by year - End. “Gold has been pushing higher because it’s no longer just a hedge against commodity inflation, it’s also a hedge against a change in world - Monetary standards”.
Reporter: Pham - Duy Nguyen
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