$ 3,400 Gold

The Acamar Journal has been warning about a sustained decline in the US Dollar (and predicting a historic bull market in gold) since it began publishing in April 2004. At that time, the US Dollar was above 93 on the US Dollar Index and gold was around $ 325 per ounce. Recently the dollar hit a low of 77.65 (down 17%) while gold reached a 28 year high of $ 750 (up 130%).

I have since written often that the price of gold will rise to unprecedented levels and that the US dollar will lose it status as the world's reserve currency.

Many of my friends and colleagues around the world agreed with my logic but felt that the US would never allow the dollar to fall, or that the bullishness I had about gold was a just tad too strong.

But now it is coming to pass.

For the first time, to my knowledge, a mainstream investment bank is predicting that the price of gold could reach $ 3,400 within 3 years. This is a major shift and portends the arrival of mainstream investment capital into the gold sector!!

CLSA is a subsidiary of the French Bank Credit Agricole, the seventh largest bank in the world in terms of assets. CLSA is a leading Asian investment bank and brokerage firm based in Hong Kong, with over 900 professionals in 11 countries.

The London Times newspaper reports that Christopher Wood, chief strategist at the broker CLSA, believes that the sub-prime mess will become a catalyst for a wider breakdown in the markets and lead to a collapse of the dollar. This could send gold prices to more than $3,400 an ounce within the next three years.

"This is not a sub-prime crisis. Sub-prime has merely exposed the bigger scam of structured finance; a scam that is about pretending that bad credit is good credit," he said.

Medium Term Gold

Prior to September 7th, gold had only closed above $ 700 for 11 days in its entire history.

Since then it hasn't come close to $ 700 again, in 24 trading days.

The chart below analyses what happened to gold from November 2005 to May 2006, a seasonally strong period for gold. (It was muted last year as gold had a 16 month period of consolidation following its May 2006 high.)

It has now exceeded that high of $ 730 by reaching $ 750. There is a strong likelihood that it will power ahead to a record high of $ 850 by the end of 2007 and perhaps $ 1,000 by May 2008.

The US Dollar is in uncharted territory, it has never been this low before:

It was the Federal Reserve's decision to cut the Fed Funds Rate that caused the dollar to drop sharply as foreign investors sold the dollar to seek better yields elsewhere.

But the US needs an ongoing supply of foreign capital to fund its federal and trade deficits! So, to raise money from skittish foreign investors (who fund about half the federal deficit and the entire trade deficit), the US will have to raise interest rates!! Indeed, long term bond yields rose after the Fed cuts rates!

Inflation is always a monetary phenomenon, and is caused by excessive increases in the supply of money. The recent liquidity injections by Central Banks to ameliorate the credit crunch have resulted in further massive increases to money supply. Bond investors will anticipate an increase in inflation (no matter how the US suppresses its CPI numbers) and will want higher yields to maintain a real rate of return. This will put upward pressure on interest rates.

The dollar will not benefit from rising interest rates as it has proven that it cannot be relied on as a store of value, which was its role as the world's reserve currency.

Gold will start to play a key role as a monetary asset (leading to increased investment demand for it).

So, when the US goes into a recession or, less likely, into a slow growth mode ala Japan in the 1990s (which will cause US stocks to fall), long term rates will be rising as foreign investors will only invest if they are offered better yields. The dollar is not likely to rise with higher rates as the loss of confidence in the US economy will be pervasive.

Can investors do better elsewhere?

• Consumer debt in the UK is about 50% higher than in the US, so the UK is more vulnerable to a recession
• France's Prime Minister Fillon announced in September that the country was essentially bankrupt, as they had not had a balanced budget in 25 years!
• Japan just produced negative GDP growth of 1.2%, after it had looked like it was finally in growth mode
• With the Euro at record highs, the rising price of exports from Spain, Italy, Greece and other countries are making them less competitive and their real estate values are falling
• The Chinese stock markets have been rising relentlessly and seem to be heavily overbought, with PE multiples exceeding 50. It is due for a severe correction.

Gold is a natural beneficiary of investors seeking to divert some funds from these this troubled economies.

As an example, Qatar held 99% of its official foreign reserves in US $. Within the last two years, it has dropped its percentage holdings of US $ to only 40%, and tripled the amount of gold from its holdings last year.

In the 1970s, as inflation set in, economic growth slowed and investors began to buy gold, the price went from $ 35 an ounce to $ 850 per ounce. As the CLSA report suggests, we may be in for an unprecedented increase in the price of gold in the coming years.

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