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As is obligatory for
commentaries written on January 1, I offer my wish for readers to be healthy,
safe, happy, and prosperous throughout the new year.
2008 in review
It is also required this
time of the year to recap the most significant events of the preceding
year. This Optimist does not want to break any rules, so here is my
detailed summary of 2008. Precious metals and energy prices rose
strongly, and the price of gold exceeded $1,000 for the first time ever, in
March 2008. Then the price of everything (except U.S. Treasuries!)
plummeted to unbelievable lows. There was also some political stuff in
2008, and some credit problems, and a few job losses, and continuing criminal
activity, and the four horsemen of the Apocalypse galloped around the
globe. 2008 was just like every other year, but with higher peaks and
lower valleys and amplified systemic noise.
Highest Gold Value
Ever
Everybody knows, of
course, that the price of gold rose to its highest level in history in
March. Many people think that gold then dropped a lot and that it is
still way down. Although it is true that the U.S. dollar price of gold
did drop significantly from its March high, some people will be surprised to
discover that the value of gold actually rose to new all time highs on the
final trading day of 2008.
The value of gold is
independent of the currency fluctuations of the U.S. dollar or any other
currency. Since charts of gold priced in a single currency impose the
currency variations onto the price of gold, we cannot see the value of gold
by simply looking at a price chart. To show value, it is necessary to
filter out the underlying currency variations. That can be done by
multiplying the price (in a currency such as the U.S. dollar) times the
composite currency exchange rate to plot the value independent of the
currency. The MoreAu Index is an approximation
of that process in which the U.S. dollar price of gold is multiplied by the
USDX trade weighted dollar index. Plotting that product over time
results in a chart that tracks the true value of gold independent of currency
exchange rate changes. A copy of the chart updated through 12/31/2008
is presented below. Readers are also invited to view the updated chart
(each weekend) at the link to
the MoreAu Index chart page.
This is
not your Grandpa’s deflation
To the surprise of
absolutely no one, the MoreAu Index shows that the value of gold reached an
all time high early in 2008 as the price of gold approached the $1,000
mark. Since then, the U.S. dollar price of gold has completed a
substantial correction, and it closed the year below $900 per ounce. Some
investors became discouraged during that pullback in price, and more than a
few voices proclaimed that a deflationary environment killed the golden
bull. My optimistic viewpoint is just the opposite. Instead of a
deflationary environment, I see a severe (but relatively short term) credit
squeeze that impacted the price of gold as it drove the U.S. dollar exchange
rate sharply higher. As that credit squeeze is alleviated, the
additional flow of funds that have already been pumped into the money supply
will provide the after burners for a high intensity resumption of the
precious metals bull. Indeed, using the MoreAu Index to filter out the
effects of currency exchange rates, the chart above shows that the real value
of gold ended 2008 at its highest value ever. An all time record high
value shows that the gold bull is very much alive and kicking.
Predictions for 2009
My understanding of
the rules for writing a commentary in early January is that the author must
include specific predictions for the coming year. Since every other
commentator does that, the Optimist will not shirk his obvious duty. Read
the following with a healthy amount of caution, however, because history
shows that some (most? all???) of my predictions have been more or less
inaccurate.
·
Gold
will hit a new high price – Gold continues to track the expanding “cornucopia”
channel I constructed two and a half years ago. As the
current credit crunch dissolves into higher inflation, I think it reasonable
to expect gold to once again race to the top of that channel. I am
hopeful that the U.S. dollar price of gold will approach $1,250 within the
next 12 to 16 months.
·
Silver
will do very well – Silver has been a neglected and almost
abandoned orphan in the economic storm. The common wisdom says that
economic activity is slowing, so industrial metals like silver will have
reduced consumption and should be sold. Past readers of the Optimist
will attest that my views are neither common nor wisdom, so I am free to take
a contrary approach. Just as fewer houses being constructed reduce the
need for copper wires, and fewer automobiles being built reduce the need for
platinum in catalytic converters, the quantity of silver needed for many
industrial uses is also likely to be reduced. In the case of silver,
however, the reduction in industrial demand is likely to be more than offset
by a greater reduction in the supply of
silver which is produced as a by product of base metals mining. As base metal
prices and production plummet from reduced economic activity, the sharply
reduced supply factor should provide a positive tone for silver prices.
Also, if the odd silver sidestep cycle continues in 2009,
then it is possible that the price of silver could target $25 per ounce in
the next 12 to 16 months.
·
Energy
prices will recover – Not even an optimist like me can hope that
energy prices will remain at their current low levels throughout 2009. My
guess is that continuing demand coupled with rising world tensions will soon
begin to push energy prices back up to around double the levels they had at
the end of 2008.
·
The
U.S. dollar will resume its decline – The sharp rise of the
dollar in 2008 appears to be directly caused by a major credit crunch, but
the fundamentals of the USA
will not support a rising dollar for long. The slowing USA economy is contributing to the current credit problems, but it is also
significantly weakening the economic strength of the United State s. As the economy continues to
decline, tax revenues received by all levels of USA government will drop precipitously, and the result
will be a widening financial crisis. The dollar will respond as it
always has in similar problem circumstances by plumbing new lows in exchange
rates.
·
Inflation
will thrust higher – Readers who agree with me that energy prices
will increase and the dollar exchange rate will suffer are likely to also
support my view that price inflation will resume its acceleration. That
does not, however, mean that all prices will increase. Pressure could
well continue to depress the prices of housing, and automobiles, and luxury
items like big screen TVs. Things that people can do without (such as
owning a McMansion instead of renting an apartment, or owning three SUVs when
one small car would do) will be under continuing price stress. The
things that people must buy (gasoline, food, clothes, rent, etc.) will resume
taking ever larger bites out of the available funds that families can
spend. The higher prices for essentials combined with added pressure
that reduced employment opportunity will impose on families will make 2009 a
very difficult year for many.
·
Buying
food and improving security now will be a great investment – Bullish as I
am about the prospects for precious metals, I continue to view them as only
the second best investment that one can
make. This is an excellent time for everyone to review
their personal security posture, and to increase the amount of food they have
available for emergencies. I hope that readers will not need either
improved personal security or increased storage of emergency food, just like
I hope that they will not need to collect on fire insurance. In
troubled times, it is less important to worry about what we hope we will
need, and more important to insure our families against risks that could be
severe.
Best of luck to
everyone throughout 2009. Cheers!
Jim Otis, “The Optimist”
The Optimist
* * * Notice * * *
This commentary presents only the
viewpoints of the Optimist, and it is intended only for perspective and
entertainment. Please do not interpret any portion of this work as
investment advice. If any of the concepts discussed here appeal to you,
then you must do the work to decide if and when and how you should
invest. The Optimist does not ask for any profits you make, and he
cannot be liable for any losses incurred as a result of your investment
decisions. The Optimist wishes you the best of luck in whatever you
decide to do or not to do.
Reader contributions are
welcome, and excerpts will be added to this presentation. Please send
comments or suggestions to the Optimist.
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