Understanding Gold Part VI: Investing in gold in the "New Era"
2000/11/26 10:28 AM
" As an aside, the United States sold 35% of its gold reserves during the late 1970's to try and halt the decline of the dollar, to no avail. Gold rose from $35 an ounce in 1969 to well over $800 an ounce in 1980. Because the dollar is also the reserve currency of the world, most currencies lost value against gold, although not necessarily to the same extent as the dollar. "
" The most impressive change in demand for dollars occurred between 1995 and 1998 when the difference between net foreign investment and the trade deficit soared from $16 billion to $56 billion. This 250% increase in the demand for dollars is what fueled the rapid increase in the value of the dollar since 1996. "
" It is no coincidence that this is also the period during which the gold price, as measured in US dollars, declined most abruptly and significantly. Between 1995 and 1999 the dollar increased by 32% against foreign currencies As determined by our foreign exchange index. This correlates very well with the decline in the gold price, which at its peak was 40%, but on average is closer to 30%. "
" When net foreign investment turns into disinvestment, it will no longer offset the trade deficit, it will add to the trade deficit. The implications for the dollar, the US economy and its stock and bond markets are dire. US residents will learn the hard way, just as everyone else in the world had to learn, that gold is our best store of value. "
" So far we have seen that the gold price is not responding to changes in mine supply and fabrication demand. The gold price is however dependent on the US dollar exchange rate and the US dollar exchange rate is determined by the amount of net foreign investment relative to the trade deficit. Therefore, to understand the gold price, as measured in US dollars, we have to understand net foreign investment."
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