Wednesday, October 03, 2007

Citigroup Sees Gold Above $1,000

For the obvious reason (its dollar price just hit a 27-year record), gold is back in the news. As far as I'm concerned, it never went out of fashion, even though it did go out of the news.

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[Thanks to midstateoffice.com and blogmd.samblackman.org for the image.]

Read this article by Jason Hamlin at Seeking Alpha. It quotes a Citigroup statement, in turn quoted by Ambrose Evans-Pritchard at the Telegraph.

For me, it's just what I've been hearing at the gold-bug websites for months; but to get it from Citigroup puts a whole new shine on it.

Remember my mantra:

You can take gold out of the standard, but you can't take the standard out of gold.

We actually have a de-facto gold standard, even though governments tried to take away their stamp of approval in 1971. It's just there; it won't go away in spite of the money managers' efforts. It will always be a haven for poor management of currency. And it looks like the managers are screwing up again.

Central banks have been selling their gold reserve stocks, but the people have been buying it up faster than the central banks want to sell it, or than the existing miners can mine it--and this in spite of the fact that physical gold pays no interest (on the contrary, you have to pay sales tax when you sell it), ETFs (physical gold funds) have management fees, and gold stocks pay very little dividends.

So why would people buy it? Because they fear the old Boogeyman Inflation is coming back to town.

How high will gold go? That depends on whether the central bank money managers can get their credibility back.

Can they? The answer depends on which writer you read.

Some are saying that the US dollar cannot ever drop out of favor as the world reserve currency, for the reason that the US is still the most ... well, if not free, at least wealthy and powerful capitalist market in the world (although Singapore, Hong Kong and Australia are stronger contenders in the freedom department, according to the 2007 Heritage Foundation Freedom Index).

And we don't know what the Fed will choose to do. It may not feel obligated to lower rates much more. If it doesn't, it would regain the world's confidence.

Others are saying that the Fed will continue to lower rates and pump credit into the system, which will cause another flight from the dollar like the one we saw in 1980. Eventually back then, the US straightened things out; but being as this is a repeat performance, this second time around the world could lose faith in the US capacity to stick to the straight and narrow any better than its nearest competitors.

As Evans-Pritchard says, however, the other relatively strong currencies (the euro, the pound, the Australian dollar, the Swiss franc, and a few others) aren't in much better shape and have problems of their own. So what we may get is a race to the bottom with currency devaluations (caused by excessive lowering of target rates) all over the world. In that case, the US dollar might regain its status through its comparatively quicker recuperative capacity; but that would be after a pretty nasty world event.

Fascinating times we live in.

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