Gold is marginally lower in U.S. dollars but continues to eke out gains in euros. The euro has fallen again today possibly as markets digest Trichet’s grim warning regarding financial contagion. Gold at €1,081.40/oz is less than 1% away from record nominal highs in euros at €1,088/oz.
Currency debasement and sovereign debt and systemic risk remains high which is leading to gold consolidating near record highs in most currencies.
Cross Currency Rates
Bernanke and the FOMC and the BOE minutes yesterday both suggest ultra lose monetary policies and zero per cent interest rates are to continue for the foreseeable future. This is a continuing positive for gold prices.
Given the increasingly precarious nature of the U. S. economic recovery, it will be very difficult for the Federal Reserve to end QE2 and thus the money printing experiment of recent years is likely to continue – although in a repackaged manner.
Gold looks set to again reach new record highs in all major currencies. It is important to remember that these are only nominal highs. In order to properly understand the real performance of any asset it is crucial to adjust for inflation.
Gold in Euros Targets €1,000/oz – Well Below Inflation Adjusted High of €1,800/oz
Gold’s record nominal high in 1980 was $850/oz. When adjusted for inflation that high was at $2,400/oz. This means that gold is some 45% below its real record price in dollars in 1980. This is just one good indication that gold is not a bubble.
Gold in Euros – 1 Year (Daily)
Gold rose from below 75 Deutsche marks to over 600 Deutsche marks in the 1970’s (see chart below). Gold rose 8 fold and gave a return of 700% in just 9 years in Deutsche marks. The German mark was one of the stronger currencies in the world during that period.
When one adjusts the euro (Deutsche mark converted) for inflation, the record high price of gold in 1980 in Deutsche mark (converted to euros) was over €1,800/oz.
Gold remains nearly half of its price in 1980 when adjusted for inflation in many currencies which should give those calling gold a bubble pause for thought.
Rather than gold rising in price, what is actually happening is that the world’s major currencies are being devalued.
This has happened throughout history. Yet, today it is happening on a scale never seen before through unprecedentedly loose monetary policies and currency debasement which is seeing paper currencies fall in value versus the finite currency that is gold.
Gold in Euros (Deutsche Mark converted) in Nominal Terms and Not Adjusted for Inflation
The paper and digital money creating experiment looks set to continue for the foreseeable future.
Until politicians in the US and other major industrial nations are able to withdraw stimulus spending and restrain public spending, as Ireland has been doing to its cost, gold will likely remain in a bull market.
More importantly, until central bankers raise interest rates to more normal levels and create positive rates of return again (above the rate of inflation) – paper currencies will continue to depreciate.
Unlike bonds, property, equities and most asset classes (and even commodities like oil) which have risen to multiples of their historical record nominal highs, gold is well below the price it was in 1980 in dollars ($2,300/oz) and other major currencies when adjusted for inflation. In January 1980, gold became a bubble after rising by nearly 100% in 1979 alone and a massive 2,400% in dollar terms in just 9 years.
The euro ‘single’ currency experiment looks increasingly shaky and there is the increasing likelihood of a return to European national currencies (drachma, peseta etc).
The euro as we know it today is unlikely to survive the current crisis and therefore gold’s performance in Deutsche mark terms in the 1970s is likely to be repeated and surpassed in euro terms. A 700% increase would see gold in euro terms rise from €250/oz in 2000 to some €2,000/oz in the coming years.
Gold would obviously rise by much more in lira, drachmas, punts or pesetas in the event of voluntary or forced ejection from the monetary union.
Given the scale of the current crisis and the fact that the U.K. and U.S. fiscal positions are far worse than they were in the 1970s, gold’s bull market looks on a very sound footing.
Real diversification and an allocation silver and particularly gold remains very prudent.
Trichet Debt Crisis is Flashing “Red” – Risk of “Potential Contagion Effects Across the Union and Beyond”
The European Central Bank President, Jean-Claude Trichet, was not as optimistic as he usually is, when he raised the alarm level on the debt crisis to “red” late yesterday.
After the meeting of the European Systemic Risk Board in Frankfurt, Trichet who chairs the ESRB, said that risk signals for financial stability in the euro area are rising and flashing “red”. He said “on a personal basis I would say yes, it is red”.
Trichet warned market participants that the crisis is nowhere close to be resolved. Trichet warned of “potential contagion effects across the union and beyond.”
Marc Faber Continues to Like Gold and Silver and Accumulating – Warns Against Trusting Central Banks
Overnight Marc Faber, publisher of the Gloom, Boom & Doom report, told Bloomberg this morning (see interview below) that he still favours gold and silver. He said there could be short term weakness but that he will keep accumulating gold. Faber warned against shorting the precious metals as they are likely to keep going up.
He also warned regarding recent incidents of fraud and corruption by newly listed Chinese companies and said this was indicative a bubble.
In his usual contrarian and witty manner, he said that “not to own any gold is to trust central bankers and that you do not want to do in your life.”
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