The US Dollar Crisis

U.S. Dollar Crisis Could Catapult Gold Over $600
By Jim Hawe
Dow Jones Newswires Monday, November 15, 2004

TOKYO (DowJones) -- The price of gold could surge to levels not seen since the early 1980s if a big chunk is taken out of the value of the U.S. dollar in coming years, one market insider says.

A further devaluation of the greenback by 20-30 percent would make bullion more attractive as an alternative store of value and could propel the yellow metal over $600 a troy ounce, said Michael Kosares, founder and president of gold firm USAGOLD-Centennial Precious Metals Inc.

Kosares said crumbling confidence in the U.S. currency due to America's enormous budget and current-account deficits has left investors scampering for safe havens such as gold.

Phones at his Denver-based office have been ringing off the hook recently and there has been a sharp increase in requests for gold-investing information packets over his company's internet site, he said.

"There has been increased buying by our regular customers, but also by a lot of first-time investors," said Kosares.



These investors have taken note that gold has been moving higher in a very tight inverse correlation to the drubbing of the U.S. dollar.

Kosares, author of "The ABCs of Gold Investing: Protecting Your Wealth through Private Gold Ownership," said the weak dollar trend will likely continue for the next four years with the Bush administration taking an almost benign stance toward the waning dollar.

"The euro bottomed against the dollar at 82 cents (October 2000) and has since peaked at around $1.30, an appreciation of 58 percent. In a similar manner, gold has risen 72 percent since its bottom," said Kosares. Gold hit a low of around $255 in April of 2001, but has been trading just under $440 in recent sessions.

The Wall Street Journal and Japan's Nikkei Financial Daily in recent days have both reported what currency traders have long suspected -- that while the administration under President George W. Bush continues to say it favors a "strong dollar," it is happy to let the greenback fall. Barring increased U.S. saving or decreased consumption, a weaker dollar is one of the few remedies for the country's current-account gap.

The Nikkei report, in line with many economists' estimates, concluded the dollar would need to fall by 20-30 percent to halve the ratio of the U.S. current account deficit to the gross domestic product -- now near 6 percent.

This is the same 20-30 percent devaluation Kosares said could kick gold over $600.

In addition to the flagging U.S. currency, Kosares said market supply and demand fundamentals also offer some compelling reasons to get into gold.

One of the most promising developments has been the trend among mining companies to close out their hedge positions.

As gold prices fell during the 1990s, mining firms aggressively hedged some of their gold, essentially locking in fixed prices for a portion of their future production.

However, this strategy backfires when gold prices are on the rise as miners are still forced to sell the hedged portion at the promised prices.

This trend reversed from around 2001 as miners began actively dehedging, or buying back hedged gold, to give themselves greater exposure to the suddenly rising spot prices.

Kosares described the huge swing in hedging to dehedging as the "backbone of the current gold bull market."

And this trend is expected to continue. A GFMS report out last week stated that the global hedge book is still saddled with around 60.4 million ounces, or 1,877 tons, which is equivalent to 75 percent of annual mine production. Kosares said this figure could actually be more than 2,000 tons.

Kosares said he believes miners will keep buying back their hedged gold in what he says will be like "having built-in market support for the next five years."

Looking ahead, Kosares said gold could be sitting in the $460s by the end of the year, with a move over $500 in 2005. A foray over $550 and even $600 is possible if the dollar loses another 20-30 percent.

Gold opened Monday in Sydney at $437.20, compared with $437.85.

So just how much gold should investors be stuffing into their portfolios? Kosares said the commonly cited 5 percent weighting may be too small in light of the current environment and suggests placing 10 percent of one's portfolio in gold.


"Gold isn't so much an investment as it is a type of savings or insurance against currency devaluation," he said. "I think if you look at an investment pyramid you would have savings at the bottom and I think gold should be a part of that savings."



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Michael J. Kosares is the founder of USAGOLD-Centennial Precious Metals, Inc., the author of The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold and numerous magazine and internet articles and essays. He is frequently interviewed in the financial press and has over 30 years experience in the gold business.