Thousands of pro-democracy protestors took to the streets in Hong Kong this past weekend, and police responded with tear gas.
These events threatened the city’s "Golden Week" festivities … and helped to give a bit of a boost to gold bullion prices in yesterday’s trading.
Stocks trading in the red also helped the yellow metal to shine after it hit an eight-month low Friday. Gold rose to $1,218.80 per troy ounce Monday after four-straight weeks of losses.
Now that gold is testing its key $1,200 support level again, it begs two very obvious questions…
- First, why has gold fallen so hard when there’s still so much economic, political and military chaos sweeping the globe?
And second, has gold finally surrendered its role as the money of last resort in today’s modern world of paper money?
Let’s Start with What Drove Gold
To New Highs in the First Place …
Gold’s ascent to $1,900 an ounce began with the 9/11 attacks 13 years ago, and was fanned by all the military conflicts that followed.
The costs, risks and danger of waging these wars provided enough paranoia to keep gold steadily rising.
Next came the economic crisis of 2008-’10, which only compounded insecurity over the United States’ financial condition.
Investors began to focus on the rapid growth of the Federal debt, which stoked speculation around the globe that the U.S. dollar would lose its status as the world’s reserve currency.
Many of these concerns persisted until the months leading up to the 2012 presidential election.
By then, Obama was clearly making good on his pledge to end the wars in Afghanistan and Iraq. Plus, our nation’s unemployment rate had been steadily retreating … the U.S. economy was starting to show signs of a recovery … and the Dow had recovered more than 6,000 points from its February 2009 low.
With renewed confidence in the equity markets, investors began to shift back into growth and dividend investments. As a result, the Dow Jones continued its climb after the November 2012 election from 12,452 to more than 17,000.
The rise in the U.S. stock market had been virtually mirrored by a rise in the price of gold from February 2009 through the 2012 presidential election.
Yet, after the election, as no signs of inflation were seen and interest rates worldwide were falling, gold’s correlation with the U.S. stock market was turned upside down.
Stocks continued to rise in price while the world market price of gold started to DECLINE …
After peaking at $1,900 in August 2011,
gold has drifted up and down,
but the trend has been clearly lower.
This flip was reinforced by a strengthening dollar as the rest of the world’s economies started to compare unfavorably to the U.S. economy.
Always remember that gold, oil and perhaps ALL of the world’s precious commodities are inextricably tied the value of the U.S. dollar.
The higher the dollar goes, the lower the prices of these resources usually go.
Look at the charts and you will quickly recognize the U.S, dollar’s role in driving the market price of gold steadily lower since August 2011.
It’s a testament to the power and prestige of the United States even in the face of the tremendous dangers and challenges in this increasingly chaotic world.
And as you can see in my chart of the U.S. Dollar Index, the greenback appears to be in recovery mode …
Image credit: Barchart.com.
At 85.62, where it closed yesterday, it’s still 5 big points away from what could be called an opportunity to "break out."
Right now, the U.S. dollar’s moves are tied to many factors, including …
- The value of other foreign countries
- U.S. and foreign interest rates
- Economic conditions domestically and worldwide
- Costs incurred and the success in fighting the Islamic State
- Plus, confidence in the role of the U.S. collar’s supremacy as the world reserve currency
However, Gold Does Have a Base Price Zone!
I’m talking about its cost of production, which now hovers at an estimated worldwide average between $1,000 and $1,100 an ounce.
If gold sinks to a price range between $1,000 and $1,100, gold mines start to close down and new supplies of gold dwindle.
The supply/demand fundamentals also face another important reality: There have been no major gold mine discoveries in over 14 years.
So gold’s relationship to the value of the dollar will stay intact until, and unless, it dips below its average worldwide production cost.
In addition, while we may be on the verge of a new age that will bring remarkable changes for the human race, gold will NOT become obsolete.
Gold will remain the only viable alternative to the U.S. dollar for most investors … and the best way to get protection against the stupidity, incompetence, recklessness and greed of politicians and central bankers.
Therefore, I continue to recommend everyone hold at least 10% of their net investable assets or retirement portfolio in physical gold as a hedge against monetary disaster.
The best way to buy physical gold is 1-ounce (one) 0.999 fine certified bars, which sell for about a $29 premium over the spot price of gold.
Compare that to U.S. 1-ounce gold eagles, which now sell for an exorbitant $60 an ounce over the spot price!
Stick with gold bars that are sealed in a plastic cardboard with see-through window.
Meanwhile, in terms of immediate market action, gold could certainly break the $1,200 support level if the value of the U.S. dollar continues to move higher.
At the same time, gold is not likely to retrace much lower than $950.
Production stoppages will keep the supply/demand fundamentals from letting the yellow metal sink any further.
Gold’s prospects are also buttressed by the real risks of war, terrorism and insolvency of many first-world nations.
Moreover, I feel no embarrassment in my prediction that gold will ultimately rise above $5,000 an ounce in the next several years.
It won’t necessarily do so because of disaster, calamity or war. But rather because any experienced portfolio manager will want to diversify their financial portfolios.
In other words, the sheer growth in the size of the financial markets world-wide will cause gold to soar in value even assuming a modest 5% average allocation to the yellow metal.
That makes $5,000 a reasonable price target even in a world that is largely peaceful and dramatically transformed by astounding new levels of technological innovation.
Watching Your Chickens,