Paul van Eeden on GoldPaul van Eeden, president, Cranberry Capital
On US Dollar, Inflation
Ludicrous for these countries to store their wealth in US dollars..US dollars are IOUs of a bankrupt government..is it a good idea?Yes.Is it viable?Yes, but with difficulty.If for example wanted to store 15%, would require substantial readjustment of gold price..essentially, gold is money, not commodity like zinc..price of gold in any given currency is the function of inflation rate of that currency versus gold and the inflation rate of that currency versus other currencies..I think people are deceived about what inflation really is..inflation is increase in supply of money..if you increase supply of money, every unit is worth less..it is not the increase in prices..an increase in prices is the result of inflation, but an increase in prices can occur for other reasons..the government and banks have basically taught us for the last 40 years that inflation is the change in prices..an increase in prices as measured by CPI CAN BE the result of inflation BUT inflation is by definition nothing more than increase in money supply..
You know George Soros and I'm going to paraphrase because I don't remember the quote exactly but in one of his books he wrote about his success. He said that he identifies a trend in motion that is based on a false premise and bets against it. There have been numerous examples of this only in my short investment career that were immensely profitable and that is why things like the true meaning of inflation becomes important. Because you can, you can recognize a false trend based on perception contrary to fundamentals and bet against it. When that turns you make an awesome amount of money.The false trend in 2007 is the perception that inflation is benign and low. The fact that people look at the CPI Coming in at 2% or 2.50% and saying that that is low inflation I mean, I know that the target is you know may be less than 3%. But that is not the inflation rate. If you measure the inflation rate which is the increase in money supply in the broadest measure that we can at the moment M3, and inflation is running at around 10% a year.
You go long gold. I did a study that I calculated the price of gold by looking at the increase in the U.S. Dollar rate, increase in gold inflation, and compensating for exchange rates. But without that third complicating factor, if you just look at the relative inflation rates of gold versus the dollar, and how the price of gold in U.S. Dollars reflects that, then there is better than 80% correlation between the market price of gold in these relative inflation rates from the period 1971 to now, except for two periods. One was the spike in 1979, 1980, which we understand it was an exchange rate phenomenon, it was a devaluation of the U.S. Dollar. There was a currency crisis in the dollar that caused the dollar to spike higher and to cause gold to spike higher than it should have. And 1996 to now which is an exchange rate phenomenon if we're correct for those exchange rate men that then we get a better than 80% and in many periods of time better than 90% correlation between the predicted price of gold through relative inflation rates and the actual market price of gold. And right now gold should be around $900 an ounce. It is only $625 because the U.S. Dollar is overvalued. Understanding that, we can see that the price of gold is going to correct and then increase further in proportion to the inflation rate of the U.S. Dollar. That is when that real inflation rate becomes important.
Gold Target:
Where gold is heading in one to three years is a lot easier than southwestern. I think one to three years we'll see gold somewhere between $800 and $1,000 an ounce. I would even be a bit more bullish than that. I say $900 give or take a couple hundred dollars on the upside. I think, I think we are entering an environment that's going to be very good for gold.
https://robtvgold.blogspot.com/2007/01/gold-stocks-paul-van-eeden-i.html