The Case for $1300/Oz Gold

In October 2007, when gold was USD 750/oz and a US dollar fetched 7.5 Chinese renminbi yuan [RMB], I published an article titled “Gold and RMB – Last Shoe to Drop for the dollar”, in which I said:

For a US family that spends $300 to $500 a month on Chinese goods, a further 40% appreciation of the RMB will translate into a $100 to $200 monthly cost increase. The logic of asking the Chinese to revalue their currency upwards is no different from asking the Saudi’s to jack up their oil price further, which is no logic at all for a US consumer. Holding Dollars is like playing musical chairs. When the music stops, the one holding the most Green IOUs, loses.

1. With a rapidly sinking Dollar vs. western currencies, the Dollar’s supreme image is now very wobbly.
2. Having built up a war chest of USD 1 trillion, the Chinese need no more Dollars to shore up confidence in its own paper within the international arena

Combining these two factors, the Chinese government will likely loosen the RMB peg to the Dollar at a faster pace, and we expect a minimum of 20% appreciation in RMB over the Dollar (i.e 5-6 RMB to 1 USD) in the next 12 to 18 months. Gold is international money, and will follow the RMB’s suit and climb to over $1,000/oz over the same period. This gold target is a conservative estimate given that other commodities from oil to copper have all quadrupled from their lows this decade. Gold’s low was $250/oz in 2001.

Gold and the RMB’s rise will be the final chapter to the Dollar’s status as the world’s reserve currency, and the end to an era of low priced Walmart goods made in China.

Now, 7 months later:

The RMB has since appreciated at the fastest 6-month pace on record, up over 7% and cracked through the psychological 7 RMB/USD barrier to trade at 6.95 RMB/USD. The talk of demanding the Chinese to revalue their currency has all but disappeared.

3 year RMB exchange rate to USD, no signs of slowing down

Gold met our 12 month target in 4 months and surpassed USD 1,000/oz in March 2008.

2 year gold chart, ready to take another crack at $1,000/oz

Fast-rising commodity prices and appreciating RMB are putting pushing up prices of everything measured in USD. Unheard of in the past decade, computer prices are going up for the first time in recent memory.

2009 Gold Target: USD 1,300/oz based on 5 RMB to 1 USD exchange rate

Let’s do an experiment: If we fix the RMB-denominated gold price constant at today’s closing of RMB 6,425/oz, the price of gold will reach USD 1,285/oz should RMB reach our target of 5 RMB to 1 USD by the end of 2009.

There are those who predict a rebound of the dollar index and a protracted USD 800/oz gold price or even lower. They just don’t get the message. Gold is an international market. Physical gold demand is mostly from Asia and as long as Asian currencies keep strengthening, the USD-denominated gold price will keep going up, regardless of what happens to the US dollar index.

Our 2009 gold target of USD 1,300/oz does not factor in external elements such as geo-politics or the speculative herd-following frenzy. I have a feeling this once-unthinkable 4-digit target will turn out to be too conservative.

Comments

[Golden Oxen:]

Great Article, Thanks

2008 May 23 08:58 AM

[Dragon Master:]

<<There are those who predict a rebound of the dollar index and a protracted USD 800/oz gold price or even lower. They just don’t get the message.>>

Most of Americans including the ones in the Capital Hills still do not realize that when the paper dollar printed from thin air with no end in sight, gold, oil and any real assets will go up.

It is very funny in the Congress hearing about oil price, never heard anyone questioning about fed deficit/worthless dollar is the key reason why oil price goes such high. It is them creating high oil price. Never forget that.

2008 May 23 10:13 AM

[GMiki1:]

Yes. What an insult to the average consumer that the U.S. government was asking the Chinese to revalue in order to make Chinese goods more expensive. But that's typical. Soak the poor and the middle class. And both Democrats and Republicans are equally clueless, though this Republican administration has been utterly criminal.

Mr. Lee's estimate for gold is conservative here I think. I would expect $1200 to $1250 by the end of 2008. I don't think the dollar will get this pop that its publicity team has been predicting. It can't sustain. We're clueless and in debt with no energy policy. A windfall profits tax for big oil? Taxes on mining companies? In other words death to the only industries we have left that are working? Those aren't "ideas." They are more of the same that got us here.

Whoever is elected, we're in a pot of water that is heating up fast. Like the frog being boiled for someone's dinner, we just haven't noticed yet.

2008 May 23 10:59 AM

[Rene Cohrt:]

Excellent understanding of the goldprice in the future, but don't discuss it with the Danes. Gold is not money, an archaing metal not worth discussion, being too speculative as a subject for investment.

They must be mad??

2008 May 23 12:10 PM

[jetsby10:]

Yeah, it's an archaic metal that people are willing to pay more and more for everyday. If that was the case, central banks wouldn't be holding rooms full of it.

2008 May 23 01:25 PM

[MC dk:]

Not all Danes are MAD.....I have my weight in silver
and xxx oz of gold

How SOON will SILVER EXPLODE.....
but buy it fysically.... not that paper crap - short future cirkus...
and ride the wave
?? WHY can't the us mint make silver EAgle's fast enough...??
because they realize that, when people buy then... they won't sell them again - for PAPER......
I am calling the US fed ...BLUFF....with REAL silver......

2008 May 23 01:43 PM

[dfinn:]

how do you hold the chinese currency?

2008 May 23 01:48 PM

[dfinn:]

how do you hold the Chinese currency? Is there an ETF?

2008 May 23 01:49 PM

[SleepyLagoon:]

Money talks. Bullshit walks. And we all know which is fiat and which is specie.

2008 May 23 02:37 PM

[jt:]

MC dk...you da man!!! ( and GMiki...you're my dog.) You just spoke for me, too...always nice to know that there are still non-braindead humans out there.

BUY SILVER...PHYSICAL SILVER (and it doesn't need to be Silver Eagles...though those can go in your IRA acct)...NOW!!!...AND FREQUENTLY...AS MUCH AS YOU CAN!!!...DO IT OR REGRET IT!! And I'm not talking 5 years from now...I'm talking 3-6 months from now. Don't even think of it as an investment (although it is likely to be the best you ever made), think of it as trading in worthless paper for real money. Trade it in as fast as you can...but start doing it, esp if you haven't already...and even if you have, keep doing it...jt

2008 May 23 04:37 PM

[mkreisel:]

What happens to US$ next year highly depends on the new administration.

If it pulls another 1980-1981, expect every commodity and stock indexes to crash hard and US$ going to the moon.

If it keeps doing the same thing as today, gold at $1500 next year is not outrageous.

2008 May 23 05:02 PM

[Rene Cohrt:]

Seeing through the comments, which wonder to establish I am not the only Dane interested in gold and silver as the only real money.

I am forced to believe that discretion has hidden the truth that all Danes are not unbelievable stupid

2008 May 23 05:19 PM

[Stable Beta:]

If the driving force behind this predicted rise in gold is a rise in the yuan to dollar exchange rate, why not just buy yuan futures? For one thing, it would require committing far less capital, leaving the bulk of your money to real investments (since gold is not technically an investment and doesn't provide income).

2008 May 24 11:52 AM

[jjason:]

I am not a fool. I would not pay $100.00 an ounce for anything.

If everyone would NOT buy gold or silver, the prices would crash.

As for US citizens buying goods from CHINA...as the US recession unfolds, there will be less money for US citizens to spend. So US citizens will have to budget more wisely. This will be good. Most folks in the US have lived wasteful lives. And our government has been wasteful too.

So, folks, forget about gold and silver as investments. Wise up. Invest in stocks that pay dividends of 5 percent or more and have been successful for many years.

2008 May 25 07:06 AM

[OJO Zafado:]

As far as naysayers go , they probably watch too much Rush and O'Reilly. You even have the Prince of the oligharchy, Kudlow denying the very serious problems that are indemic to the US economy and by extension it's currency. We must now wait another 3 weeks for the next Treasury TIC report. March -$45 billion! Many of us agree with the author's assertions that the Chinese have enough fiat linen currency on hand from Uncle Sam and are now looking to place the value of their economy into other areas. They have undertaken the building of a strategic petroleum reserve as well as entered the international LNG market as buyers. Risking being branded racist, I will cite the degradation of what used to be Rhodesia. The nation of South Africa is now heading down the same road as "Zimbabwe". If you destroy all the white people like they did in Haiti and Zimbabwe you can create a nation where extreme poverty and genocide reign supreme as the top industries. We have already seen a huge spike in N/A coal GACHF from +$1 to $7. FDG from $20-$40 to $72 etc. This due to a world wide coal shortage as S African output is curbed by a grossly mismanaged economy. The more they screw things up the more they screw things up. At the root of their problems are their ideas for solutions. What we have been doing so far is really achieving our goals so lets do some more of it! It is the goals that are a problem! This is going to manifest itself in the world's largest gold producer (China) having a very strong currency while production of gold , platinum and palladium from So Africa declines. We have seen what declines in Russian and Mexican oil production have done in the oil market. The US economy is in worse shape than almost any can imagine. Even the most timid proposals for facing up to the current accounts deficit severely ballooning in the NEAR years are trashed by Congress. McCain would try some reality in curbing future entitlements while the OBama would increase taxes to try and sustain a system that is in fact spelling the doom of the US economy. The US economy is what backs the US $. Without a strong economy the US dollar will continue to slide, perhaps precipitously. World gold production is quite likely to decline even as the demand continues strong. Watch the TIC reports. Three negative reports in a row may lead the Treasury to start cooking that economic barometer as well. The US government and their people are in major denial that an economy built on a huge foundation of Federal, State, County , town , city government and personal debt devoid of a strong manufacturing job base will not collapse! The richest nation on earth is now facing an increasing mortality rate from hyper and hypothermia amoug the youngest and oldest in our society. As heating oil climbs to $5 gal and the Nat Gas market reacts to the equvalent BTU pricing people are going to br increasingly unbearably hot in Summer and freezing cold in Winter. The next President no matter who he is will do little or nothing to reign in Ben the Dollar Slayer. (S)He will just be the next leader of the "Free Money World". A few billion in aid to Egypt so they can subsidise their gasoline at less than 1/3 what we pay. A few hundred billion each month in TRCAs and TFAs to keep the free money flowing. We might as well elect "ALF" "Hey!!!, No problem!!!!" as President. Of course this spells the eventual doom of Ben as he will no doubt at some point be exposed as a "Dummya" Toady and resign in disgrace over the whole dollar and economic situation spiralling out of control. His will be a very sincere heartfelt apology to the American people. Five percent dividends will not cut the mustard when we find the 4 major banks still floating out new tax advantaged subordinated debt paper at +8% and paying less than 4% on one year Cds that are 100% taxable. FNM-PRP 6.3% tax advantaged ADJUSTABLE! rate. Even the GSEs are up against it! The math no longer works in America! Calculus is something that forms on teeth and Statistics is what they use to calculate bridge girder specifications! The only thing left to do is to replace the Criminal Jackson on the $20 bill, with Ron Reagan! "Social security is a sacred trust between the American people and their Government". A beautiful piece of wordsmithing, legitimizing the nation's sense of entitlement and the tyranny of the old!

2008 May 25 08:52 AM

[CaptBob:]

Ever wondered what happens as the Chinese Yuan strengthens VS the dollar??
The Billion Chinese whose wages have actually increased and can't wait to replace that bike with a scooter and buy oil, will have it within their means, since the oil is priced in dollars. And add in the Indians.

And the oil will be bid up, for there will be less, resulting in the dollar being pressed down. And away the spiral will go leaving us in the dust.

And you can say the same thing for gold--they will want that too. So convert your paper to gold which will rise, and thus you will be holding Yuan.

2008 May 25 09:43 AM

[OJO Zafado:]

For trading the Yuan/Renminbi there is the recently available CNY & CYB of Wisdom Tree . Cover Your Butt! A chart of EVDVF shows broadly diverse generous dividend paying Canadian play, with perhaps some overhanging tax issues. Canada is of course like Australia & Mexico a part of the BRIC juniors. With the Loonie again over par and their economy sporting a thining $3 billion current accounts surplus, you can get some decent total return on the China currency appreciating. Any country like Canada, Mexico, Brazil, or Australia are good surrogets for the Renminbi as they are beneficiaries of the continuing rise in value of hard assets. They also have currency Etfs. FXC, FXM, BZF,& FXA respectively. As one other poster noted fleeing the US dollar may be warranted on the basis of holding value in your investments. The Oligharcy has unwittingly duped themselves. The Globalization they so ferverently advocated has now resulted in the unitizing of "value". Anyone with $500 to open a Scottrade account can now switch their savings out of the US dollar with a couple key strokes. This is no different than the Fed giving up the printing of money in favor of xferring a $100 billion of electronic created money to major European Banks through a one month TRCA. We now see the Congress trying to thwart this action into ETFs like USO,USG, UHN, IEO etc with legislation to curb/ limit futures trading. That one issue should be enough to scare investors out of the dollar. Even the Dow global Titans are losing ground as even their global businesses are not enough to over come Stagflation!

2008 May 25 09:50 AM

[Joseph E Fa...:]

I live near Victoria, BC, and am now 65 years old, an investor and in business since I was 19.5 yrs old. John Lee's comments and thoughts are among the most insightful I can remember from all my investment learning. As young as he is, he's a beacon to those who come to this site. Kudos and all best to you, with my thanks. Stay strong, we need you!!

2008 May 25 10:16 AM

[RapidTrends:]

Very well written John and to the point. Many are ignorant of the global market, thinking in terms of their own national economies only.

A real wake up call is on the horizon, and a huge opportunity for wealth creation for those with the eyes to see.

www.rapidtrends.com/bl.../

2008 May 25 01:29 PM

[Mr. G:]

I agree with the author, but the overlooked reaction is the hedgefunds and big money boys reaction when the US keeps falling into recession. The market psycology of these players may push gold to well over $1500 the ounce.

2008 May 25 04:30 PM

[Michael B. ...:]

Trade imbalances exist because of the undervalued yuan (and unequal labor cost). You forget one thing: US (and European) demand for Chinese goods will fall dramatically as the imbalances correct, thus the Chinese economy will slow and they will have less buying power. Why buy a Chinese DVD player for $60 (instead of $30) when I can get a higher quality Japanese one for $60?


As long as I've lived, Japan was (and still is) an export economy. The same applies to China with a much larger scale of magnitude. A strong currency will kill their GDP growth.

And then there are crude input costs. If China entirely removed the subsidies on crude (they force their refiners to run at a loss), margins on Chinese businesses would be at further pressure. The stronger currency would help offset this pressure, but at the same time would dramatically reduce demand for their goods from world consumers.

2008 May 26 11:06 AM