Is Gold Expensive at $791 an Ounce? Why Gold Will Continue to Soar Much Higher

Is Gold Expensive at $791 an Ounce? Why Gold Will Continue to Soar Much Higher. By J.S. Kim.

November 2nd, 2007

I’m not really sure how all the “Gold at 27-year high” headlines came to be, but my own calculations tell me that gold would have to break at least $2,400 an ounce to break its supposed 27-year high. When discussing the purchase of a 7-series BMW that sells for a MSRP of $90,000 today, no one ever looks at its sales price from 5-years ago at $35,000 and exclaims “BMWs are trading at a 5-year high!” That would be ludicrous. One would have to factor in the effects of inflation and the decreased purchasing power of the dollar before being able to make a reasonable assessment of how expensive BMWs really are today.

At today’s prices of over $790 an ounce, gold is still cheap. If we experience a correction any time soon, and gold breaks back down to the $720 level again before continuing higher, it will just be really cheap. Here’s why.Anyone that’s ever studied the formula that is used to calculate the Consumer Price Index(CPI) in the U.S. knows that the formula has been greatly tinkered with over the years to produce absurdly low inflation numbers that are merely an artificially manufactured number that probably fits some pre-determined number the government would like to report. This pre-determined inflation statistic is needed to maintain consumer confidence in the economy and to keep the hot air flowing that is necessary to keep the U.S. stock market bubble rising.

One of the most closely watched indexes to gauge U.S. economic conditions is the core Consumer Price Index (CPI), which is viewed as THE measure of inflation in the U.S. economy. However, the core CPI just happens to exclude food and energy prices. The government excludes these factors because they claim, these sectors have a history of being extremely volatile. Thus, they feel that their inclusion would skew real inflation rates. This is the dumbest, most deceptive piece of junk that I’ve ever heard. Skew them? No, their inclusion would just tell you what real inflation is. The government concludes that fantasyland numbers are skewed and that real numbers should not be disclosed to the public for fear that real inflation numbers, if reported, will kill stock market rallies. As Morpheus tells Neo in the Matrix, “You take the blue pill and the story ends. You wake in your bed and believe whatever you want to believe.” The government is serving up blue pills left and right in most of their key economic statistics and reports, and the public gladly ingests.

When crude oil remains above $80 a barrel for months on end, and citizens necessarily have to spend USD $80 a week on gas alone, this affects the amount of money they can save. When higher oil prices cause higher transportation prices and thus higher food and higher EVERYTHING prices, then every citizen necessarily spends more money every month on the normal basket of goods they buy. Core CPI represent true inflation rates for all citizens that don’t have to eat and don’t use heat and don’t drive a car. When you can find such a planet, then I’ll concede that the government’s core CPI statistics are accurate. When energy prices are high and the purchasing power of the dollar is being diminished, the CPI inflation index can understate true inflation by 100% to 200%.

The U.S. Federal Reserve’s unstated goal has been for years, to keep inflation rate at 3% a year or less. It is ironic that many times, the exclusion of energy prices and food prices from the core inflation index allows them to “accomplish” this. When inflation, as reported by the CPI, is stated as “under control”, the thundering sheep herd rejoices, plunges money into U.S. stocks, and amazingly, often European and Asian markets follow, also rising on this news in the short term. However, given this target, I’ll explain how I concluded that the price of gold today, in inflation-adjusted dollars, has to reach a minimum figure of $2,400 in today’s dollars to surpass its 27-year high of gold on September 21, 1980.

In the chart below, I have plotted two series of prices. The light blue series shows the high price of gold in 1980 of $850 an ounce, the average annual price every year thereafter, and the Nov. 1, 2007 price of $791 an ounce in non-inflation adjusted dollars. The red series merely demonstrates the 1980 high price of $850 an ounce in inflation-adjusted dollars every year thereafter.

To calculate the inflation-adjusted $850 an ounce price as equivalent to $2,400 in today’s dollars, here are the assumptions I made. With $850 an ounce as my base price in 1980, for the sake of simplicity, I added an average 3% annual inflation rate to this price every year from 1980 to 1997.

I didn’t bother to chart the exact government released figures for inflation every year because we know that they are a total farce anyways and would be a waste of time. If you wonder why I used the higher end of the U.S. Federal Reserve’s “unofficial” annual inflation target of 3%, this is because most years between 1980 and 1997, it was most likely significantly higher, so as a conservative measure, I accepted the Fed’s annual target rate as the “real” inflation rate. From 1998 to 2007, however, I used a “real” annual inflation rate of 5.5% and here is my rationale for doing so.

The formula for determining the CPI in the United States was further tinkered with under President Clinton’s reign. The are many variations of CPI that are calculated, some that include the price of food, some without, but all have been tinkered with in one way or another to minimize the numbers. In fact, often the CPI index that shows the lowest rates of inflation is the one that is officially reported.

To begin, there is the ludicrous substitution factor in which a cheaper good is substituted for an increasingly expensive good in the basket of goods that determines the CPI index. For example, if the cost of beef is rising but chicken prices remain constant, the government assumes beef eaters will not eat beef and substitute a cheaper food in its place like chicken. For those carnivores that love beef, they will continue to eat beef and pay a premium to eat beef. That’s inflation and it’s real though this inflation component is actively removed from the CPI index every month. Secondly, the government is constantly adjusting and tinkering with the components of the CPI index without actually reporting on what specific adjustments they are making. However, you can be certain that whatever adjustments they make are not increasing inflation numbers but lowering them. The opacity of this action is probably worth at least another 0.25% to 0.50% being added to the official inflation numbers. Finally, the basket of goods that determines the CPI index at one time was equally weighted. That meant that if the CPI index contained 100 items, each item received a 1% weight. Not anymore. Now, the CPI index is manipulated by a weighting system that most heavily weights the goods that have dropped the most in price while least heavily weighting the goods that have increased the most in price. For example, if in January, the cost of beef is cheap it might receive a weighting of 3% in the basket of goods. In February if the cost of beef soars, then it may altogether be dropped from the basket of goods or perhaps it the weighting may be reduced to 1%. Because every single change in the calculation of the core CPI index over the years has been designed to minimize inflation, I’ve added another 2.5% to the target rate of 3% as a conservative addition for the last decade. That is how I arrived at an inflation rate of 5.5% for the last decade.

Using the above calculations, I’ve concluded that if gold were to reach its 1980 heights, it must reach $2,400 an ounce. Several years back, once gold broke the $500 an ounce barrier, almost everyone was saying it was way too expensive to purchase. When it soared higher and then broke back down to the $570 level, I was saying how cheap gold was. Hopefully we’ll get a correction soon to allow us to purchase more at even better bargain-basement prices, but just like back then, I firmly believe that a time will come when people will reminisce with amazement at how cheap gold was at $790 an ounce.

Rich Dad's Advisors: Guide to Investing In Gold and Silver: Protect Your Financial Future

The Ultimate American Dollar Collapse

American's don't believe that the Dollar can collapse, but all the forces of our reckless ways will eventually come back to haunt us.
With Gold at nearly $800.00 an ounce, and Silver at nearly $15.00 an ounce, both have already doubled since 2001, however with never ending deficits even in good times, eventually confidence in the dollar will begin to erode at an ever expanding pace, leading to a collapse in the dollar and Gold and Silver at astronomical prices when denominated in Dollars.




The Day After the Dollar Crashes: A Survival Guide for the Rise of the New World Order
The Day After the Dollar Crashes: A Survival Guide for the Rise of the New World Order

Dollar's Fall Starts To Stir Worry

Greenback's Value May Drop to 800th of an Ounce of Gold

By A. BALLA, Special to the Sun | September 28, 2007

http://www.nysun.com/business/dollars-fall-starts-to-stir-worry/63549/

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Concern is growing in New York, in the wake of last week's meeting of the Federal Reserve Board, over the quickening collapse of the value of the dollar, as foreign investors proclaim that a "for sale" sign has been hung on the city and economists and analysts warn that a collapsing currency bodes ill for the economy.

 Crash Proof: How to Profit From the Coming Economic Collapse (Lynn Sonberg Books)

In the week since the Fed's meeting, the soundness of the dollar has been ebbing rapidly, with the greenback's value plunging to a 732nd of an ounce of gold from a 708th of an ounce when the Fed moved to ease the money supply in hopes of preventing a collapse of the credit markets. It was the dollar's lowest level since 1980, with some analysts expecting it to drop even further, to 800th of an ounce in the next six months.
For the first time in three decades, the dollar is now equal in value to the Canadian loonie, and the euro, which is trading at a high of $1.41 this week, is the strongest it has ever been against the dollar in its eight-year history. This is not good news for America's economy, experts say. "No country in the world has ever fought itself to prosperity by weakening its currency," the manager of the Merk Hard Currency Fund, Axel Merk, said. "The Fed decision to cut rates last week was wrong."
Some economists argue that a weak dollar, particularly against other currencies, helps American exporters, at least in the short term. "But on the whole, a cheap, and cheapening, dollar exchange rate is bad medicine. It's bad medicine for Americans," the editor of Grant's Interest Rate Observer and author of four books on finance, James Grant, said. "It reduces the value of American wealth in terms of other currencies, and of the nations that print them. It tends to mean a rise in the cost of imported goods and services — that is, it's inflationary."
The Federal Reserve chairman, Ben Bernanke, has not shied away from talking about an increased risk of inflation, but has argued that this risk will be kept in check, and that the Fed first must tackle the current liquidity crisis.
"The inflation rate is something we pay close attention to," Mr. Bernanke said last week. "An economy cannot grow in a healthy, stable way when inflation is out of control, and we will certainly make sure that that doesn't happen."
Despite these assurances, a number of analysts argue a weak dollar is already hurting Americans by curtailing their purchasing power. "Among the big losers are American households that buy imports as part of their everyday shopping," the director of the Center of Trade and Policy Studies at the CATO Institute, Daniel Griswold, said. "All things being equal, we are better off with a stronger dollar."
The image of the dollar as the benchmark currency for the world is also taking a bashing. Several large central banks — such as those in Russia, China, and some Middle East countries — hold billions of dollars in cash in their reserves. Since the greenback has been falling in value, however, many of these institutions are starting to diversify their holdings, dumping the dollars for other, stronger currencies, such as the euro.
Russia, for example, now holds only about 40% of its reserves in dollars; at one point it held more than 70%. The United Arab Emirates converted 8% of its dollar reserves to euros in December. China, which doesn't release data on its foreign currency holdings, has said it is slowly diversifying its dollar-dominated reserves.
"Reserve diversification is a inevitable gradual process, and the world economy can no longer be dependent on America as the only reserve economy," a senior economist for Moody's Economy.com, Tu Packard, said.
This diversification process acts like a sell-off, because by holding dollars in their reserves, these central banks are in essence buying shares in the American economy. As they sell the dollars, they are selling their interest in our economy, Ms. Packard said.
"The dollar is the world's currency — most greenbacks circulate outside the 50 states — but America's monetary policy is designed for America and no other country. That is certainly a nice convenience for us. But it will tend to weaken foreigners' confidence in our Fed and our Treasury," Mr. Grant said. "You've got to remember that this country produces much less than it consumes. It finances the difference with dollars. Here is one of the sweetest arrangements on the face of the earth, but it will last only so long as non-Americans willingly accept our dollars, these green pieces of paper of no intrinsic value."
Still, the administration in Washington is exuding confidence. "I think I've been pretty clear on this — a strong dollar is in our nation's interest," the treasury secretary, Henry Paulson, said in a press briefing Friday. "And our currency values are always determined — and I believe they should be determined — in a fair, competitive marketplace based upon underlying economic fundamentals. And so what we do in the United States and what I very much advocate is policies that are going to increase confidence, maintain confidence in the U.S. dollar and in our economy."

The Day After the Dollar Crashes: A Survival Guide for the Rise of the New World Order 

Saudi's Exit from the Dollar could spell Collapse for the Dollar

By Ambrose Evans-Pritchard, International Business Editor 6:45PM BST 19 Sep 2007

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Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.

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"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.

"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.

The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.

As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy.

 The Day After the Dollar Crashes: A Survival Guide for the Rise of the New World Order

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The Fed's dramatic half point cut to 4.75pc yesterday has already caused a plunge in the world dollar index to a fifteen year low, touching with weakest level ever against the mighty euro at just under $1.40.
There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.
The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit - expected to reach $850bn this year, or 6.5pc of GDP.
Mr Redeker said foreign investors have been gradually pulling out of the long-term US debt markets, leaving the dollar dependent on short-term funding. Foreigners have funded 25pc to 30pc of America's credit and short-term paper markets over the last two years.
"They were willing to provide the money when rates were paying nicely, but why bear the risk in these dramatically changed circumstances? We think that a fall in dollar to $1.50 against the euro is not out of the question at all by the first quarter of 2008," he said.
"This is nothing like the situation in 1998 when the crisis was in Asia, but the US was booming. This time the US itself is the problem," he said.
Mr Redeker said the biggest danger for the dollar is that falling US rates will at some point trigger a reversal yen "carry trade", causing massive flows from the US back to Japan.
Jim Rogers, the commodity king and former partner of George Soros, said the Federal Reserve was playing with fire by cutting rates so aggressively at a time when the dollar was already under pressure.
The risk is that flight from US bonds could push up the long-term yields that form the base price of credit for most mortgages, the driving the property market into even deeper crisis.
"If Ben Bernanke starts running those printing presses even faster than he's already doing, we are going to have a serious recession. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems," he said.
The Federal Reserve, however, clearly calculates the risk of a sudden downturn is now so great that the it outweighs dangers of a dollar slide.
Former Fed chief Alan Greenspan said this week that house prices may fall by "double digits" as the subprime crisis bites harder, prompting households to cut back sharply on spending.
For Saudi Arabia, the dollar peg has clearly become a liability. Inflation has risen to 4pc and the M3 broad money supply is surging at 22pc.
The pressures are even worse in other parts of the Gulf. The United Arab Emirates now faces inflation of 9.3pc, a 20-year high. In Qatar it has reached 13pc.
Kuwait became the first of the oil sheikhdoms to break its dollar peg in May, a move that has begun to rein in rampant money supply growth.
 
Crash Proof: How to Profit From the Coming Economic Collapse (Lynn Sonberg Books)