Friday, January 11, 2008

Gold at 900?

Instead of talking about how crappy the economy is, let's talk gold, a fascinating subject. The value of gold, as we see above, is fairly constant except for some major features such as WWI and the recession of the 1980's. Don't let the vertical scale fool you, that is logarithmic, meaning the peak value in 1983 was possibly $600 per ounce (and about $2,000 today) . Sorry about the graphics but they were free. But the idea is that gold has an intrinsic value and all currencies respond up or down compared to that value.

The second graph shows that since the year 2000, the US dollar have been worth less compared to the value of gold, since it costs more dollars to buy the stuff. But even if a dollar was worth less in 2000, if you bought a bunch you could have sold today at $900 per ounce, tripling the money on the table. Nice work if you can get it.

Traditionally, gold was a hedge or investment for when times go bad, economically speaking. This usually means the US economy has gone to pot again. But over the last two decades different parts of the economy have become decoupled, the first being the peso devaluation in the 1980's that impacted our area possibly the most:

Gold bottomed on June 21, 1982 at $US 296. This was the climax of the collapse from the $US 850 level which had been reached exactly 29 months earlier - On Jan. 21, 1980.

Gold took off when the Fed lowered U.S. rates in response to a threatened debt default by Mexico. But this time, and after having been flat since late 1976, so did the Dow. In fact, the big up move which constitutes this Gold "buy signal came in the same week as the start of the "Reagan Bull".

What also became evident was that the DOW Jones and other large trading houses were losing their share of the US economy to ... people like you and I, consumers. We multiplied, got baby boomed, bought houses and cars, and spent a ton of money. The consumer contribution is now a tremendous portion of the US economy as compared to agriculture, industrial, and financial markets. The disconnect between gold, Wall Street, and the economy can be traces back to Richard Nixon who took us off the "gold standard" and the rise of the Euro currency.

The Euro is considered a more stable currency these days, so as the US dollar weakens it becomes less - from 80 cents on the Euro to 68 in the last year, a bad trend since the dollar used to be priced much higher than the Euro (1:1 or better). Let's just say a hamburg and a coke in England can cost 15 USD on special. World economists don't mind such bizzare things happening but there is a growing move to stop trading in US dollars:

  • All gold is traded in dollars per US dollar on international markets
  • All crude oil is traded in dollars per US dollar on international markets
So I guess the answer is, hold onto your SPI property and think about some market strategy. Like I said, I'm still learning, and my brother has been burned buying gold before so always get a professional opinion before buying the stuff.

But how about the CVB putting up advertisements in England so we can enjoy some of their economic success? Their hamburg and coke would only cost a few Euros. /sam

1 comment:

Lucinda said...

This was a good read, Sam. Even if I am more of a silver kinda gal.
Apple was at $200 just a few days ago... wasn't it?
At least the weather was nice today.