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Gold reaching $1,100/oz. November 10, 2009

Gold Fever

1. With gold price briefly surging over $1,100 an ounce on Friday, I found the following data interesting:
2. Long term U.S. Dollar index – Trade weighted Exchange Rate 1973 – 2009

You can clearly see the decline since it peaked in 1985.

1. With US dollar index free-falling, gold and commodities (traded in US dollar) are poised to go up some more. Crude oil is the same too. That’s why lower U.S. dollar is inflationary. Whether you like it or not, we will pay more for crude oil as US dollar drops.
2. If the fed is determined to keep the US interest rate at record low level, the US dollar will decline against other currencies. Once U.S. economy shows some signs of life, Gold prices will drop because U.S. dollar index will go up as the Fed starts to raise interest rates to combat potential inflation in the future.
3. On the way to work, I saw many signs advertising “Cash for Gold” at Tysons Sheraton hotels. Is this the sign of a top? Many people have tried to call the top of the stock market in the past. The streets are littered with failed predictions. The market has a way to out-smart everyone. The up-trend has a tendency to stay up for much longer than predictions.
4. An Englewood N.J. gold dealer estimated that 10 times as many people come in to sell gold now as when gold was selling at #300 an ounce around the beginning of the decade.
5. The Reserve Bank of India last week bought 220 tons of gold from IMF for $6.7 billion because India is taking a lesson from Chinese central bank moving away from US treasury bills. See chart above.
6. This trend will continue until US economy is clearly out of danger. By then interest rate will go up and US dollar will follow. However, its long-term down trend will not be easily broken.
7. Even the tiny Sri Lanka’s central bank bought gold last week. This can’t be good news to U.S. dollar and U.S. Treasuries.
8. In order to hide their oversea cash, wealthy U.S. investors are converting their cash from Swiss banks into gold to keep them away from the Tax man. No document here. No tax to Uncle Sam who is flat broken.