Here is some good logic from Kaplan
KAPLAN'S CORNER: Question (from Brett Boal): Why do you predict that the price of gold will rise, if the demand for gold will rise about as fast as the supply? Answer: Actually, the World Gold Council's numbers show that demand for gold will rise more quickly than the supply, but the difference is likely to be only a few percent per year. In general, over very long periods of time, the supply/demand balance for gold is roughly at equilibrium. Therefore, the price of an ounce of gold tends to remain the same in terms of purchasing power, such as the number of commodity baskets that can be purchased with a single ounce of the yellow metal. The primary reason for my bullishness on gold is connected with the fact that around the world gold is priced in U.S. dollars. The dollar has been able to remain generally strong against most major currencies over the past decade, though only because of the hyper-inflated U.S. stock market. Strongly overvalued U.S. equities have had the following two key effects, which are closely related: they have created a temporary, artificial demand for U.S. assets (including stocks, real estate, and Treasuries); and they have created a temporary, artificial demand for the U.S. dollar. This stronger dollar has caused inflation to remain low at the same time that valuations of U.S. real estate and corporate market capitalizations are high. The economic boom caused by the hyperinflated equity market has also caused low unemployment and other signs of a boom era. Thus, the U.S. economy looks like a marvel of success rather than the abject failure that it really is, as measured by hard facts like an all-time record corporate and personal debt as a percentage of assets, an all-time record U.S. trade gap (the U.S. is by far the world's largest debtor nation), and a nearly all-time record low savings rate. Once the U.S. stock market accelerates its decline, as it has actually been doing since the Russell 2000 peaked on April 22, 1998 (it is down more than 20% since then), and this downturn becomes clearly evident to investors worldwide (in other words, the Nifty Fifty/Dow join along), the value of all U.S. assets and the dollar will collapse. The lower dollar will trigger increased inflation. Lower corporate assets will make the high ratio of corporate debt to assets even higher (as companies' stock prices fall, their absolute debt load will of course stay constant), thus causing a recession. The recession will pull down the dollar further, which will cause a continued decline in stock and real estate prices, which will pull down the dollar still further, and so on. All of the upside excesses of the past decade will be reversed. The less purchasing power the dollar has, the fewer baskets of commodities can be purchased with any fixed number of dollars, and therefore the higher the price of gold will be, even assuming that there is no increase in demand relative to supply. In real life, of course, the fact that gold will be one of the few truly liquid assets that is rising in price while everything else is falling apart, will itself create its own demand, thus pushing up the price further. Over many years, of course, the supply for gold will rise to meet this increased demand (and its sharply increased price), but since it takes three to five years for a gold mine to go from initial exploration to full production, the gold rally is likely to last for quite some time. Eventually, the recession will become steep enough that the U.S. will be forced to import less, and the dollar cheap enough that the U.S. will be able to export more, thus improving the trade gap, which will slowly reverse the entire process. Thus is the nature of the economic cycle. goldminingoutlook.com |
