Gold captures 14-year high (dollar continues to plummet)

[expatriot]

http://money.cnn.com/2004/01/05/markets/gold.reut/index.htm

LONDON (Reuters) - Gold stormed to its highest price since February 1990 as the dollar crumbled against the euro and the yen and speculative funds maintained their appetite for precious metals.

Spot gold was at $420.75/421.45 an ounce in afternoon trading in London, well up from $416.25/416.75 at European opening and what had been a long-standing objective at $417.70.

"The precious metals are all off to the races -- they are all up on the U.S. opening," analyst Kamal Naqvi of Barclays Capital said.

New York futures markets re-opened for the first time since December 31 Monday, and all the precious metals leapt higher. Silver jumped to its highest since April 1998, while platinum rose some $20.

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It is weird to me that gold is skyrocketing simultaneously with the stock market... I thought they had more the most an inverse correlation?

[J B]

1. In traders' minds gold is more affected by the US$

So the stock market is almost irrelevant.

[Warpy]

10. Exactly

The stock market is being driven more by pension funds and off-the-top tax giveaways than by prudent investing strategy. The main things holding it up are wishful thinking and habit. It is as hyperinflated now as it was at 7000, when Greenspan warned about "irrational exuberance." Check out those P/E ratios against their historical ratios if you don't believe me.

Meanwhile, back at the boardroom, the CEOs are cashing in and dumping their stock options as quickly as they can, further driving the surge in gold prices as they look for someplace safer to put their ill-gotten gains.

The rest of us are in for an extremely bumpy ride over the next few years, no matter whether Bush steals the next four years or not. There isn't a damned thing we can do about it, either.

[denverbill]

2. The best I can come up with is this.

The dollar is dropping like a rock. A lower dollar means US exports are cheaper to buy, so US exporters should do well this year. Also, multinationals who sell goods abroad should show higher profits, since the purchases are made in euros, yen, etc. So McDonald's may sell the exact same number of burgers in France (bad example) and keep their prices the same, but when the profits are recorded in US dollars, they are much higher.

Generally speaking you are correct about gold and stocks: gold is often seen as the ultimate in safe haven investing, safer than bonds and treasuries because it has some intrinsic value. After all, nobody wants to be left holding 30 year bonds paying 5% interest if the dollar is dropping in value by 20% per year.

[SpiralHawk]

4. Something tells me McDonald's won't be selling as many burgers

in 2004 as it did last year.

Mooooooooooo!

I'm Mad as hell and I'm not taking it any more.

Moooooooooo!!!

How High the Moon?

- From your friends at CLF (Cow Liberation Front)

[muriel_volestrangler]

5. gold's intrinsic value has no relation to its price

which means it's far less safe than putting money in savings accounts. If it's only just got back to its 1990 (US dollar) price, think how much you'd have lost if you bought it in 1990 and then had to sell in 2000?

[denverbill]

7. You are taking a very short time frame.

Yes, gold will vary in price relative to the dollar or any other currency, but it still retains largely the same value over longer periods of time. In 1833, an ounce of gold would buy you about $19. Now, an ounce will buy you $420.

It isn't that gold is more valuable than it was in 1833. It's the value of the dollar that has changed.

In 1936, bread was a nickel a loaf and an ounce of gold cost $34.87. That means an ounce of gold could buy 697 loaves of bread in 1936.

Today, a loaf of bread costs $2 and gold is $400/ounce, so you can buy 200 loaves of bread for an ounce of gold.

How much can you buy with a nickel today?

[muriel_volestrangler]

9. Yes, this is the problem with gold

it doesn't get more valuable. It's gone up, in terms of US dollars, about 12 times since 1936 - compared with 13 times for the Consumer Price Index (1/0.076 - from http://oregonstate.edu/Dept/pol_sci/fac/sahr/cv2003.pdf).
So, if you could find a deposit account that could match the Consumer Price Index, you'd have done better than investing in gold - without the risk of large price fluctuations.

In Britain, "Equities have grown an average of 5.3 per cent a year (after inflation) - five times the rate of gilts (1.1 per cent) and cash deposits (1 per cent) - since 1899, according to the Barclays Capital 'Equity-Gilt Study'" (http://money.guardian.co.uk/investments/shares/story/0,1456,883301,00.html) - so if that 1% applies to US deposits too, you'd get about twice as much money by putting you money in a deposit account over 67 years than investing in gold. Invest in stocks, and you get about 30 times as much.

So gold is better than keeping your money under the mattress, but not much else.

[Art_from_Ark]

12. The problem today is that the dollar is a fiat currency

That is, it has no intrinsic value, and the supply can be inflated at will. Gold, on the other hand, has been recognized as money for thousands of years, and its supply is governed by nature and man's ability to find it.

Sixty-seven years ago, there was, technically speaking, no investing in gold in the US. The only gold that could be "invested in" was "rare and unusual" gold coins-- in other words, collector coins. If one had bought the right coins, in the right condition, in those days, then the return would have far exceeded any kind of generic investment. For example, any US gold coin from the 1930s (with the curious exception of the 1932 $10 gold piece), in pristine condition, would be worth thousands of dollars today.

Of course, the argument about investing in a savings account must be qualified, since most banks quit paying interest after a few years of inactivity. These days, many banks will even charge a fee to maintain an account that has a balance below a minimum amount. In addition, taxes must be paid each year on the interest, while no taxes are paid on gold unless it is sold at a profit.

Timing is also important. Gold bought for $42.77/ounce in 1972 could have fetched $800/ounce (theoretically, but the real amount was closer to $600/ounce) in early 1980. If I could have come up with the $50 to buy a generic $20 gold piece in 1969, I could have sold it for $600+ in 1980-81, even after the first gold crash.

[Art_from_Ark]

11. Interesting

I'm curious as to why you chose 1833 as a reference date. It is true that an ounce of gold was worth about $19 in that year ($19.39, to be exact), yet the next year, the value of an ounce was raised to $20.67, where it remained until 1933.

I'm also curious about where you got your "loaf of bread" prices. What kind of bread are we talking about? I was in a US supermarket recently and found several loaves for sale at closer to $1.00-- some for as low as 79 cents. If we used the 79 cents figure, then an ounce of gold would buy more than 500 loaves.

[Dover]

3. moved my question to the Economics forum

...

[bemildred]

6. Gold is a bet against the dollar, and an inflation hedge.

The markets have more to do with expectations of economic
performance in the short run, which is "recovering" somewhat
right now. It's easier to deal with if you admit to yourself
that it has more to do with Las Vegas than Adam Smith.

[indepat]

8. Just think what it will be like after "Four more years, four more years."

[leesa]

13. And of course The Bush Crime Family is cashing in big time

with their giant gold mine. They are raping us in every position known to man.