Where is the Gold Price Going?

By: Julian D. W. Phillips | Fri, Apr 28, 2006
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Gold has held the lower $600 levels, a level higher than expected. It appeared at first that it would reach $625 then pullback to bounce off +$605, but no it cleared all barriers to hit $641 before falling back to +$620. It has now consolidated at these levels for a short while before climbing back through $630 at the time of writing. The market is still blinking in amazement in rarified air around these prices. But despite what ones logic says, these prices are real and appear to be holding. So where now?

Many extremely competent observers have given projections of $1000 to $3000 to $6000. These prices say far more than a $ price of gold. They describe global economic conditions that are very different from today.

These give rise to our forecast - We forecast the price of gold will rise to the point when the U.S. $ will be quoted in the numbers needed to buy a gram or an ounce of gold.

This would prove all the above forecasts right, but better describe the future of the global economy. In such a scene the path to be followed from today's conditions to those points would see a fundamental rupturing of the global "harmony" we are experiencing at present, leading to full-blown uncertainty in money and economies, alongside a general breakdown of confidence down to the level of each one of us.

We are moving towards such a scene on several fronts, each causing the fall of the next 'domino' against the next one and so on. We look here at the different 'dominoes' leaning heavily against the next one already.

Oil

The Oil market is rapidly moving to a point where there will be insufficient oil to supply global needs. Once this point is reached, the only way to bring back a balance to the demand / supply formula will be to curb demand. Here lies the rub!

With all global governments committed to putting the interests of their nation above all others, the first step has to be for those able to do so securing their own supplies in a manner that ensures no other nation can access them. Once this is done the balance left over for the open market will be far from sufficient to supply the rest, so the price will rise to heights unheard of, still leaving many nations far short of their requirements. Those who did manage to secure their supplies, will have to pay the market price, we have no doubt. So the oil price heights achieved are unlikely to be short-lived. It appears they have the potential to choke off growth in most countries!

Effectively all currencies will have been devalued in terms of the oil price. Specifically the price of oil in each currency will define the extent to which that currency has been devalued.

Real Currency Values?

The pressure on oil producers to be careful of the currency they accept for their oil will be intense.

After all if its issuer is simply printing money, whose value has become suspect, would it be sound policy to accept too much of it? If you had a person in dubious financial straits, would you accept his I.O.U. and if so at what point would you seek collateral.

Of course, if as an oil producer you are dependent on your customer for your existence, your options would be limited [U.S. / Arab States]. However, if you are an oil producer like Russia supplying Euroland and China, other currencies would suit you far more than the $. Indeed, it would be pragmatic to save into your reserves those currencies you will need to trade on all fronts, internationally and in proportion to the percentage each trading partner is involved with you. This percentage would be governed by both imports and exports.

In this environment the sovereign risks that you would be taking in accepting currencies would grow by the day, to the extent that the customer nations are facing economic hardships either through inflation or deflation, a natural consequence of the economic disruption caused not only by oil prices but the ruptures in oil supply each nation faces.

Because the currency system is founded on confidence, each currency would have to have a sort of confidence gauge, to guide recipients of those currencies, not only for oil, but on any transaction using a currency anywhere in the world. This would not be the exchange rate, which would work apart from some obvious realities, but a gauge resembling a credit rating. After all each currency is a "I promise to pay the bearer....."

Where this would leave each individual nation would depend upon its power within the global economy and upon their need for that country. For instance a desert nation producing oil would be of far more importance than a relatively self-sufficient nation producing little to export and importing a great deal. What value would their currency have in the context of the situation we described above?

Inflation or Deflation or both?

A high oil price can be both inflationary and deflationary. Why? Should a nation fight the 'ripple' effect of high oil prices by not having sufficient economic momentum to permit higher oil prices to be passed along the line easily, then they will be acting in a deflationary manner, taking money from the consumers pocket that he cannot replace by demanding higher wages. However, if the momentum is there and prices can be passed on then inflation results. Add to that a Central Bank willing to print extra money to cover extra costs [imported or otherwise], then inflation will attempt to remove the effect of higher oil prices through cheaper money. Such a battle will not go on for too long as this inflation will be different in every currency, and each country will try to meet or beat each other, so long as they retain exchangeability. [Zimbabwe is a classic case where this has been lost, with even the locals demanding payment from each other in the U.S.$ rather than in their own currency].

In a nation like the U.S. one will find both inflation and deflation in different areas, different sectors and different industries, governed by the ability or inability to pass on price increases. It will not be sufficient to hide the two by totaling them and coming up with a low inflation rate, rather the on-the-ground reality will have to be faced with controls and supports outside the monetary arenas. Government controls will be a new unwelcome feature of many nations lives thereafter.

Exchange Controls

One can be sure that a growing feature of the economies that encounter such distress will be the imposition of Capital, if not full Exchange Controls, protecting the internal health of the economy from the withdrawal of foreign investment. Will this happen to the U.S. of America? The economy is more than capable of self-sufficiency, provided it can both access foreign oil supplies and ensure that the Dollar does not collapse internationally.

In such a situation the inflow of foreign owned dollars might well look as though a boom was being fuelled by foreigners, but it would be accompanied by a sell-off in the Bond market and rising long-term interest rates, the recipe for heavy inflation, but with this scene would come the demise of the $ as a global reserve currency and its fall in the foreign exchanges of the world, spurring heavily rising import costs.

Would the Fed be able to contain such a situation? It would appear that they could if they permitted inflation to surge and simply kept interest rates abreast of inflation levels.

However, price stability and with it the U.S. citizen's confidence in his own currency would suffer as never before. With the U.S. having never experienced such a loss of confidence in their institutions or currency such as would be seen then would lead to a stampeded into anything likely to hold its value. This would include gold, if permitted by the U.S. government [unlikely!]. The trauma the average citizen, integrated as he is into the banking system, would have a cultural impact as well, a feature not to be seen elsewhere.

Gold in such a climate.

Where accessible, gold as was the repeated case in past epochs, will come to the fore at the individual level to the institutional and governmental level. The qualities it has often demonstrated in extreme monetary as well as social levels in history, will rise to the occasion. Those possessing gold will feel protected from government and monetary failure as we see in India and the Middle East right now.

But whilst this is a well-documented path, what is not often experienced is the different extents to which confidence is shaken. A currency collapse in Europe or even the Middle and Far East will be a repeat of the past, so the adjustment to the new currency regime will be smoother and less traumatic. In the States where confidence in the country, the system and the currency is far higher than anywhere else in the world, the fall from grace of the $ will be extremely traumatic and disruptive, if and when it comes.

Will this happen? It could happen soon!

In future articles in our publications we will cover the details of this disturbing future and its impact on gold!

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.
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