Gold Blows Through $1300 As US Dollar Races To The Bottom
No Gold "Bubble" In Sight
Gold topped $1300 per ounce and then kept rising to nearly $1320, while silver gained even more, in percentage terms. All of gold's gain (and then some) came from a weakening dollar. The euro gained nearly 10% to the dollar last month, rising from $1.26 to $1.37. The same trend is evident over the last quarter, since the euro's bottom at $1.19 in June. Since gold's entire gain (and then some) in recent months is due to the dollar's decline, the price of gold is flat or declining in terms of other currencies. Bottom line, there is nothing near a "bubble" in gold, and there is still plenty of time to enjoy gold's rise.
Gold is making unprecedented headlines in daily newspapers, on CNBC and on the Internet, while nearly every investment conversation begins, "Have you noticed gold lately?" Neophytes often say, "I don't own any gold. How do you buy it? Is it too late to get on board?"
Gold is far from a "bubble" investment. Gold's volatility is super-low, which is another bullish sign. The CBOE's Gold Volatility Index has fallen 23% since June 30, a sign that more buy-and-hold investors are coming on board. Gold is no longer rising in a predictable two-steps-up, one-step-down dance, but more like four or five steps up, one step down. Private investors are buying and holding, not trading, while large hedge funds are adding strategic gold positions rather than trading the metal. For example, Northern Trust, Inc., with a massive $603 billion in assets, recently doubled its holdings in the SPDR Gold Trust to $1.5 billion in the second quarter, making it the second largest holder of the ETF. James McDonald, chief investment strategist, recommends a 5% strategic gold allocation for clients, not as a trading position, but as a core holding.
The Bottom Line: Gold set a new record high each day last week, the dollar sank sharply and stocks fell for the week.
The Dollar is Winning the "Race to the Bottom" Among Currencies
Last month, the U.S. dollar posted its biggest monthly loss (in euro terms) since 2008, as the euro rose from $1.27 to $1.38 in September. Meanwhile, currencies from Brazil, Taiwan, South Korea and other strong markets posted major gains against the U.S. dollar. This led Brazil's Finance Minister Guido Mantega to say last week that "we're in the midst of an international currency war," as many central banks seemingly want to weaken their respective currencies in order to gain a competitive advantage.
Here are some other examples of how the dollar is winning this "race to the bottom" among currencies: The Japanese yen and Turkish lira have each more than doubled in the last six years. The Australian dollar is up 35% since the beginning of 2009. The Brazilian real is up 15% so far this year and 10% since June. The euro rose 11.5% to the dollar last quarter while the Japanese yen gained 5.6% in the same quarter. The euro's low was $1.1917 on June 7, so the euro is up 14.4% against the dollar in four months.
The euro's recent rise is especially dramatic since it came in the face of news that some euro-zone nations are in crisis mode: Last Thursday, the Irish government said the total cost of fixing its banking industry could reach $68 billion, which could push Ireland's budget deficit could rise to as high as 32% of GDP! In addition, Moody's downgraded Spain's credit rating last week, while Spain was suffering a general strike, its first in eight years, shutting down Spain's transportation network. There were also worker strikes in Belgium, France, Greece, Lithuania, Portugal and Slovenia over the euro-zone's austerity cuts. In face of all those upsets, the euro rallied to the dollar, mostly since the Federal Reserve has caved to inflationary policies while the Euro Central Bank's (ECB) added strong austerity measures.
We are seeing a historical first. Currencies have never overtly "raced to the bottom" before. There was always some national pride involved in supporting one's home currency, but not now. Robert Mundell, the inventor of the euro and "the world's foremost expert on currency systems" (according to the lead editorial in last Friday's Wall Street Journal), has said that the euro's wild swings this year are a "terrible thing for the U.S. economy," adding that "we've never been in this unstable position in the entire currency history of 3,000 years." While that sounds a bit grandiose, it's true that currencies have never before been in full "free float" mode while nations are trying to weaken, not strengthen, their currencies.
The reason why this "race to the bottom" is dangerous for the world economy - and good for gold - is that multi-national businesses can't plan their cross-border transactions with any security. It's like not knowing if your tax rate is 10% or 40%, since currency losses are a form of a hidden tax. As Robert Mundell said, "With competitive depreciation, mutual losses are certain." Mundell adds that the dollar was once the world's official reserve currency (1944 to 1971) but that leadership role was abdicated in the 1970s. Until recently, the dollar was the unofficial world reserve currency, but now that role is changing.
Bottom Line: The World Will Chase Gold and Other Commodities
The falling dollar looks like good political news, on the surface. A lower dollar gives the U.S. a rising competitive advantage vs. other currencies. In fact, U.S. exports recently surged to a 20-month high, thanks to a weaker dollar. In the meantime, the Federal Reserve talks about the threat of deflation! The Fed wants to print far more money in future months to fight this phantom deflation threat.
Due to all the commodity inflation brewing - thanks to the declining dollar - the Fed's recent deflation warning is being ignored by investors. Instead, the world is chasing commodities, reflecting a desire for inflation hedges. Demand for the base metals is based on rapid emerging market growth. In particular, China's economic growth is reaccelerating and will continue to put pressure on commodity prices.
Among private investors and hedge funds, gold should emerge as the favorite commodity investment, since it is a much larger market than platinum, palladium, tin, silver and some other metals, and gold is clearly the bargain of the bunch. Do not believe any who warn of a "bubble" in gold. There are no indications yet of any bubble gains in the gold market.
RARE GOLD COINS MARKET UPDATE:
Gold Coin Sales Higher
Most dealers are getting a larger influx of new customers due to rising gold bullion sales. Some of these new bullion buyers start buying rare gold coins. Many $2 ½, $5 and $10 Indians rose in price and decreased in availability in September. Dealer inventories of these coins are shrinking while demand is rising. This is a formula for higher prices now and in the future. Some better rarities like 1929 $5 Indians and Carson City Double Eagles really don't last long in anyone's inventory.
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