What is going on with gold? Numerous gold producers see gold reaching at least the $US1000 an ounce mark by the end of the year – yet the price is currently languishing well under $US850oz. That said, gold is currently on the rise again this week as the US dollar is poised to fall more after its recent strength. Was the US dollar going through a dead-cat bounce? Well, whatever some people call it there is a clear case that America’s economic plight is far from over. More bad economic news from USA’s financial sector is expected over September.
While the fallout from subprime and the over-inflated US housing market continues one must also consider the weakening American consumer. The US economy remains the largest in the world and despite the rise and rise of the Chinese middle class US demand for consumer items is likely to still be at least 7 times greater than China’s. Stocks in China have also been copping a considerable hammering over the last couple of weeks and falling commodity prices for copper have been attributed to falling demand from the Asian powerhouse. Falls in base metal prices have reverberated around the world and quite noticeably in Australia with its mining sector battered from days of selloffs and volatility on the ASX. Looking at China, even the most casual observer would notice that it has an export-based economy, which takes us back to the American consumer.
Various reports from the US have confirmed that the sky-high oil price has weakened consumer spending in recent months. While oil has been falling in the last couple of weeks the fall in the dollar will start oil’s climb again as oil is pegged to US currency. Although no one claims to have a crystal ball in these matters, the history of leading investment bank Goldman Sachs deserves special mention. Not only did Goldman Sachs survive the 1929 stockmarket crash, it also escaped much of the subprime shakedown that started last year.
Four days ago Goldman Sachs was reported by Reuters as saying the price of oil would hit $US149 a barrel by year-end. Should the prediction come true the impact on the US consumer will be widespread. But one must also consider why Goldman Sachs made this call. The investment bank made an effort to say there was more behind the price of oil than the relation to the US dollar. However, that does not mean these other factors are as important as the US dollar. This interpretation would mean the US dollar is likely to be subject to considerable devaluation over the next few months. What will cause this fall? All we can do is speculate until the bad economic news is released. Now let us reconsider the price of gold. Its recent fall has been unexpected as gold has held true in periods of past inflation. Whether the official national figures for inflation accurately reflect this or not, there should be no doubt that prices for food, fuel and living have increased markedly this year.
If Goldman Sachs can see oil dramatically rising in the future what can banks with massive holdings in gold bullion see down the track? Arbitraging markets is nothing new and should not be ruled out. If a consortium of interests got together and dumped gold onto the market they could push the price well down If the same consortium knew of impending bad financial news they could then slowly start buying up gold again before the news hits the stands, realising a massive profit. Both gold and oil have fallen in tandem recently, in fact, gold has fallen even faster than oil.
The volatility gold and oil cannot be ignored but investors should not lose sight of the fundamental reasons driving the long term growth of these key commodities. America is in a bear market and there are no clear skies on the horizon. Now could be a good time to make long term plays on the price of gold which is likely to rise because of its value as a hedge against declining fiat currencies such as the US dollar. If you need proof all you have to do is chart the price of gold against the US dollar from the creation of the Federal Reserve Bank in 1913, or since President Nixon killed the currency’s hedge to gold in 1971.
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