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Turk was misquoted on Buffett but sees more breakouts for gold
Gold rush may mean inflation bust;
The metal's recent jump worldwide
and high oil prices signal
serious inflation pressures ahead.
By Katie Benner
Friday, June 24, 2005
NEW YORK -- Gold rising along with the dollar -- and with oil
jumping to record highs near $60 a barrel -- may signal serious
inflation woes ahead.
It's enough to give a gold bull deja vu.
A handful of precious metals insiders at the recent New York
Institutional Gold Conference predicted that the price of spot gold
will hit $850 an ounce in the next few years from its current level
The last time it got anywhere near that high was in the late 1970s
when out-of-control inflation, unrest in the Middle East and an oil
crisis pushed the precious metal from $150 to $810 a troy ounce.
Gold is currently trading 30 percent above its 10-year moving
average on the New York Commodities Exchange, and gained five
percent this month to stand less than $10 away from March's peak at
$446.70, even while the greenback gained against the euro.
During the recent dollar rally, the American Stock Exchange's index
of gold-mining stocks, or BUGS, also moved toward three-month highs,
and individual gold and mining stocks including Placer Dome, Newmont
Mining, and Barrick Gold have moved in tandem with indexes.
This, some economists contend, points to a troubling inflation
problem, greater than currently perceived.
"Despite all the rate hikes, the (Federal Reserve's) overnight
lending rate is still less than inflation," said James Turk, co-
author of the book "The Coming Collapse of the Dollar and How to
Profit From It."
It is oil prices that are really making the gold market look like
1970s redux, with crude prices hovering near $60 a barrel.
While economists debate whether high oil prices will spark inflation
or will slow economic growth by acting as a tax on consumers and
businesses, the gold and bond markets have come down on the side of
"The recent run in gold has moved in conjunction with rising crude
prices," David Meger, senior metals analyst at Alaron Trading, said
in a recent note.
Gold prices began to jump higher in the third quarter of last year,
concurrent with the latest oil price surge.
"Middle East nations are getting more petrol dollars as (oil) prices
rise, and they're not putting it back into paper assets," said
Charles de Vaulx, manager of the First Eagle Gold Fund. "They're
trying to protect the value of their profits -- just like in the
1970s -- so they're buying gold," he said.
With oil prices so high, some traders believe there's still a
considerable upside to gold, despite the fact that some market
analysts, like MKM Partners' chief market technician Katie
Townshend, say the metal has become overbought in the short term.
"Based on historic ratios between gold and oil, gold should now be
over $500 an ounce," said Frank Holmes, chairman and chief
investment officer as U.S. Global Funds. "Or the price of oil needs
to come down to $40 to $42 a barrel."
When inflation grips a market, the value of dollar-denominated
assets is eroded. So a shift to gold represents, among other things,
a broader shunning of financial assets in favor of hard assets as a
hedge against perceived currency risks.
"Even Warren Buffett is buying gold because he sees the dollar as
weak," claimed Turk.
At the moment, however, gold and the dollar are both rising. But
metals traders argue that the price of gold is still an accurate
indicator of inflation risks, because the dollar's rise doesn't
reflect true strength, only relative value compared to an equally
"Confidence in the euro as an alternative to the dollar has fallen
apart," said Frank Holmes, chairman and chief investment officer as
U.S. Global Funds.
Michael Darda, chief economist at MKM Partners, said that currency
weakness across the board has helped to keep the dollar from falling
as gold rises.
"Gold prices are rising against almost every major currency," said
Darda, noting that it's unusual for gold and the dollar to be rising
at the same time. "So the run up in gold prices here has not
affected the dollar to the benefit of other currencies."
Darda said spot gold would have to hit over $1,000 an ounce to
signal a currency market collapse like the one that hit at the end
of the 1970s.
Few analysts believe the metal will trade between $600 and $800 over
the next few years, mostly because they assume rising oil prices
will slow demand for fuel and eventually bring crude prices down.
But consulting firms like Alaron Trading are still bullish on gold,
particularly because they see weakness in a variety of paper assets.
"Four to five years ago when the equity bubble burst we were hopeful
that gold demand would surface. But people went to other asset
classes like real estate or hedge funds," said de Vaulx.
"We're seeing both real estate and hedge fund become more uncertain
now, and if it's going to happen, we'll see the investment demand
for gold," de Vaulx said.
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