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The FRN$ has been the world’s reserve currency
for decades. As a result, the breadth and depth of the capital markets add
tremendous liquidity to the fiat currency illusion.
This is one of the reasons the FRN$ is near the
bottom of the liquidity pyramid and rises
in value with each round of the credit contraction. But as continuing pressure keeps being added to the
FRN$ through bailouts, inflation, swaps, etc. it will hasten towards the fiat
currency graveyard as commodity currency alternatives gain prominence.
The secular gold bull market has entered stage two and continues
pulling in capital. This has led to a large multiple of the gains inverse to
the FRN$ decline. But more importantly and more often gold and the FRN$ are
strengthening together. This is because of their respective positions in the
liquidity pyramid.
So as the FRN$ continues its evaporation the Ancient
Metal of Kings will do what it has always done; preserve capital. As it has
performed this function over the last eight years it has also increased in
purchasing power. As gold enters the third stage of the bull market, which is
still likely several years away, it will strengthen even more often while the
FRN$ both advances and declines.
How to Predict
the Price of Gold
Jeff Clark, Editor, Casey’s Gold &
Resource Report
Long-term readers know that gold moves inversely to
the dollar, meaning if the dollar drops, gold tends to rise (and vice versa).
This happens with about 80% regularity. But what many gold writers
haven’t acknowledged is the leveraged movement our favorite metal has
demonstrated this year to the world’s reserve currency.
The U.S. dollar index, a six-currency gauge of the
greenback’s value, has dropped 7.8% so far this year (as of December
3). Meanwhile, gold is up 38.7% year-to-date. In other words, for every 1%
drop in the dollar index, gold has risen 4.9%. If that approximate percentage
holds over time, one can begin to estimate what the gold price might be if
you know what the dollar might do.
While the dollar is likely to bounce at some point,
making gold correct, the long-term fate of the dollar has already dried in
cement. If the dollar were simply to return to its March 2008 low of 71.30
next year – a 4.6% drop from current levels – this would imply a
rise in gold of 22.5% and a price of about $1,478 an ounce.
The long-term scenario is more dramatic. If you
believe the dollar will lose half its value from current levels, this would
imply a gold price around $4,164. If you believe it will lose 75% of its
value, gold would reach about $5,642. Doug Casey has called for a $5,000 gold
price; if he’s right, guess what that implies for the dollar?
And think about this: these calculations ignore what
else might “show up,” such as when price inflation shows up in
the economy, the greater public shows up to buy gold, or the Chinese
don’t show up at an auction. Could $5,000 gold be too low?
Unless you think the dollar’s problems are
solved, its eventual demise is gold’s eventual glory. Prepare, and
invest, accordingly.
And keep up on the gold and precious metals markets
in Casey’s
Gold and Resource Report.
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from Brigham Young
University, a law degree from California Western School of Law and studies
the Austrian school of economics. He works as an entrepreneur, investor,
journalist and monetary scientist. He is a strong advocate of the freedom of
speech, a member of the Society of Professional Journalists and the San Diego
County Bar Association. He has appeared on ABC, NBC, BNN, many radio shows
and presented at many investment conferences throughout the world.
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