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here is an argument by Paul van Eeden:
http://www.gold-speculator.com/paul-...-now-what.html
We can calculate the percentage change in the US money supply on a year-over-year basis for each month, and then calculate a rolling 12-month average of the monthly, year-over-year changes (link). The average increase in the US money supply over the past twelve months, on that basis, has been 8.44%. That is a very high rate of monetary inflation for the United States. For example, the average inflation rate during the 1970s was 8.33% based on the increase in the Actual Money Supply.
To correctly analyze gold's value vis-à-vis the dollar we also have to consider the inflation rate of the gold supply. The value of gold declines in proportion to the net amount of gold that is added to the above ground supply of gold just like dollar inflation devalues the dollar. While I don't yet have all the gold production and consumption data for 2009 to complete the calculation, I estimate that the gold inflation rate could be around 1.5% for the year.
For a quick and dirty answer we can subtract the expected gold inflation rate from the dollar's inflation rate (~8.5% less ~1.5%) to arrive at a rough guide to what gold's average value for 2009 could be in terms of US dollars. The average value of gold was $762 an ounce in 2008. If we now add ~7% to that we arrive at an estimate of $815 an ounce as the average value of gold in terms of US dollars for 2009.
To correctly analyze gold's value vis-à-vis the dollar we also have to consider the inflation rate of the gold supply. The value of gold declines in proportion to the net amount of gold that is added to the above ground supply of gold just like dollar inflation devalues the dollar. While I don't yet have all the gold production and consumption data for 2009 to complete the calculation, I estimate that the gold inflation rate could be around 1.5% for the year.
For a quick and dirty answer we can subtract the expected gold inflation rate from the dollar's inflation rate (~8.5% less ~1.5%) to arrive at a rough guide to what gold's average value for 2009 could be in terms of US dollars. The average value of gold was $762 an ounce in 2008. If we now add ~7% to that we arrive at an estimate of $815 an ounce as the average value of gold in terms of US dollars for 2009.
The market appears to be too fearful of inflation and has factored too much potential future inflation into the gold price. The Fed clearly announced that it would end the monetization of Treasury debt by the end of October this year and the monetization of agency debt in the fist quarter of next year. That means that in six months' time the Fed will stop creating inflation. I realize that the FOMC could decide to extend the monetization of debt, but at this time we have no reason to believe that it will. Therefore it seems to me that the current bout of Fed manufactured inflation is coming to an end.
The US government, however, will continue to run a massive deficit that has to be financed with the issuance of Treasury debt. Assuming the Fed stops supporting the bond market and the Treasury keeps issuing record quantities of new debt, we can expect to see US interest rates start moving up.
The current level of interest rates in the US is historically, and unnaturally low. Interest rates will rise. It's a question of "when", not "if". Given that the Fed has announced it will stop supporting interest rates in six months, and that the market is forward looking, it could be sooner rather than later.
Rising interest rates could be positive for the dollar in spite of the massive issuances of US Treasury debt, and that could put downward pressure on the gold price since the gold price moves inversely to the dollar's exchange rate.
So in spite of the fact that the Fed has been inflating the US money supply by monetizing debt, and in spite of the fact that dollar-bearishness is in abundant supply, and that the US dollar is very likely losing its status as the sole reserve currency, there is a good chance that US interest rates will have to rise and that could cause a rally in the US dollar and a decline in the gold price.
The US government, however, will continue to run a massive deficit that has to be financed with the issuance of Treasury debt. Assuming the Fed stops supporting the bond market and the Treasury keeps issuing record quantities of new debt, we can expect to see US interest rates start moving up.
The current level of interest rates in the US is historically, and unnaturally low. Interest rates will rise. It's a question of "when", not "if". Given that the Fed has announced it will stop supporting interest rates in six months, and that the market is forward looking, it could be sooner rather than later.
Rising interest rates could be positive for the dollar in spite of the massive issuances of US Treasury debt, and that could put downward pressure on the gold price since the gold price moves inversely to the dollar's exchange rate.
So in spite of the fact that the Fed has been inflating the US money supply by monetizing debt, and in spite of the fact that dollar-bearishness is in abundant supply, and that the US dollar is very likely losing its status as the sole reserve currency, there is a good chance that US interest rates will have to rise and that could cause a rally in the US dollar and a decline in the gold price.
Given that the gold price is trading at a 25% premium to its fair value and that we can imagine several scenarios whereby the US dollar could rally and the gold price could fall, it seems to me that betting on a higher gold price right now is merely a bet on the Greater Fool Theory. That is not to say that the gold price could not continue to rally - markets can remain irrational far longer than rational people ever imagine they would. Personally, though, I have no interest in buying an over-priced asset in the hope that it will become even more over priced - not even gold.
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