Gold Continues to March Toward $4,000
Commodities / Gold and Silver 2011 Aug 05, 2011 - 12:03 PM GMTBy: Barry_Elias
$1,700.
The above represents the price of gold per ounce that was nearly reached Thursday (high of $1,683).
During the past month, gold has risen 10 percent to $1,650.
My Moneynews blog, dated January 7, 2011, and referenced below, provided an analysis in support of gold reaching $4,000 per ounce in the coming decade
Following the publication of my article, John Paulson, founder of John Paulson & Company, suggested the same. You may recall, during the 2008 financial crisis, Mr. Paulson earned over $3 billion, individually, by shorting subprime mortgage-backed securities (anticipating a decline in these asset prices).
Since my article was published, gold increased 20 percent over 7 months from $1,370 to $1,650.
As I anticipated, the equity market has declined. In just 4 days, it dropped 800 points, or 7 percent.
This, despite the so called “big deal” regarding the U.S. debt limit.
Ironically, the negotiations between the president and Congress have further destabilized the U.S. economy as global leaders perceive weakness in our ability to service the voluminous debt load.
European economic growth is expected to decline as inflation edges upward. Even Germany expects lower GDP (gross domestic product) growth.
Debt deleveraging is of paramount concern. The result will be a decrease in aggregate demand for financial assets and debt. Attracting capital will require higher yields, thereby depressing equity prices and increasing pressure on interest rates.
To prevent rate increases, the Federal Reserve may extend quantitative easing (money creation). Ironically, this action may exacerbate the underlying issue: unproductive resource allocation.. Excess funds that generate little added quantity and quality cause price increases of existing stock.
Despite this scenario, housing prices, on average, will decline further due to a larger increase in supply. Inflationary expectations deter profits and future investment, which further depress equity prices and increase interest rates.
This global uncertainty enhances demand for the value and stability of exchange found in gold. Gold requires nearly $500 per ounce to produce. Therefore, its misuse is less likely to distort normal economic markets and activity.
China has been accumulating excess foreign currency reserves of $500 billion annually, nearly three times the total world demand for gold.
Currently gold represents less than 2 percent of its foreign currency. As China diversifies its foreign currency reserve portfolio away from U.S. dollars, gold will become an attractive alternative.
The aforementioned portend further increases in the price of gold going forward.
By Barry Elias
eliasbarry@aol.com, beb1b2b3@gmail.com
Barry Elias provides economic analysis to Dick Morris, a former political adviser to President Clinton.
He was cited and acknowledged in two recent best-sellers co-authored by Mr. Morris: “Catastrophe” and “2010: Take Back America - a Battle Plan.” Mr. Elias graduated Phi Beta Kappa from Binghamton University with a degree in economics.
He has consulted with various high-profile financial institutions in New York City.
© 2011 Copyright Barry Elias - All Rights Reserved
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