Rhody Trader

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TraderMike pointed out an article expressing the view of some gold fund manager. They provided a set of resaons why they think the metal is going to $1500. Now I’m not going to disagree with the idea that gold will eventually get there. The long-term price charts certainly suggest as much. I’m just not a big fan of their reasoning from a fundamental perspetive.

Reason No. 1: The dollar’s value is declining.
How much lower is the dollar going to go? Low enough to raise the value of gold 50%+ from here. The value of the dollar now already accounts for more Fed action, so the idea that further declines in Fed Funds and/or the Discount rate will keep weakening the greenback is a bit weak. This is especially true when the actual rates the folks looking to capture interest rate differential come from the market, not from the Fed, and they are already very low.

Reason No. 2: More inflation on the way.
I won’t argue that inflation is a concern. The commentators are talking about finished goods inflation, though, citing that we’re already seeing it in pipeline prices (which we definitely are). Gold, as a representation of that, already reflects what is basically producer prices.

Reason No. 3: Investors will seek greater safety.
They will certainly do so if stocks continue to head south. Otherwise, the equity market will be the place capital goes, not gold. Keep in mind that gold generally has a negative carry because it cost money to store it.

Reason No. 4: Oil is getting pricier.
A big part of the oil/gold link is because both are priced in dollars. If that doesn’t keep falling, this linkage becomes less secure, or means a reversal in prices.

Reason No. 5: Gold should follow other commodities
“Since so many other metals, including copper and oil, have smashed their inflation-adjusted price records, why shouldn’t gold follow, asks Holmes.” I don’t know if I should even address this logic. Of course gold doesn’t have to do what other commodities are doing. Tell my why it should. Give me the linkages.

The question I can’t help but ask the author and the guys he interviewed is where’s the supply/demand analysis? Feel free to support the above arguements or make your own. Like I said, I’m not disagreeing with their target. I just don’t like the analysis - or at least the way the article’s author presented it.

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