The Best Year So Far

2008-JAN-02

Gold continued its winning streak in 2007 climbing 31.4% against the US dollar, which is its best year so far. Gold has now risen for seven consecutive years, and not just against the US dollar.

As the following table shows, gold also has a seven-year winning streak against the Japanese yen and Chinese yuan. Against the Australian dollar, Swiss franc, British pound and Indian rupee, gold has risen six of seven years. It is also important to note that gold has climbed in each of the past three years against all the major currencies of the world.

The following chart illustrates the information in the above table.

Will gold continue its winning streak in 2008? Of course only time will tell because no one can predict the future. Nevertheless, one thing is certain. If central banks persist with actions that debase national currencies, the gold price will continue to rise in terms of those currencies.

Given all the debasement that we have seen over the past seven years, it seems like a sure bet that central banks are not going to change their ways. Their pronouncements to 'fight inflation' and to protect a currency's purchasing power are nothing more than hollow rhetoric, which point is clearly illustrated by the following chart:

Note how the price of crude oil has risen in terms of these national currencies, but remains essentially unchanged in terms of gold. Crude oil is not becoming more expensive; rather, the purchasing power of national currencies continues to diminish. In fact, the price of crude oil has remained essentially unchanged for decades, when measured in terms of gold.

Had the gold standard not been abandoned in 1971, nobody today would be talking about the rising price of crude oil simply because the price of crude oil would not be rising.

As we begin this New Year, we should focus on the big picture. Today's monetary system of national currencies is broken, with inflation, global imbalances and 'hot-money' being some of the more visible results.

Central banks do not protect the purchasing power of national currencies. They have a different objective, which is to make sure governments receive all the money they want to spend. It is a recipe for disaster given the penchant of politicians to spend as much money as they can. There is today no discipline on the creation of new money, which was the most important attribute of the classical gold standard. The link to gold limited how much money central banks could create, which in turn limited how much money politicians could borrow and spend.

So what does 2008 hold in store? Anyone reading these alerts for any length of time I think knows the answer. There will be more currency debasement. And currency debasement means gold will rise when measured in terms of the debased currencies.

The price of crude oil in 2008 though will remain more or less the same in terms of gold, somewhere around 3 goldgrams per barrel. So if, for example, crude oil rises to $150 per barrel this year as some people expect, a 3gg per barrel price would indicate that gold's exchange rate to a debased dollar would rise to around $50 per goldgram ($1,555 per ounce). It would also extend gold's winning streak to eight consecutive years.