Feb 22, 2007 

Gold continued to rally nicely after this post, as did AUY. By early Dec it hit $646, then started to correct for the rest of the month. Early Jan, was a bit unsettling as Crude was selling off hard, and taking Gold with it. But Gold bottomed a few day later at $597, and has been uptrending ever since. It hit $677 on wednesday. AUY has done well also, gaining over 40% since Nov 1st. The Gold uptrend continues.
After observing Gold's price activity, in relation to Crude and the Currencies, for some time now. I have my doubts about the "inflation hedge" scenario that most people reason for the bull market in Gold. Certainly Gold rallied with Crude and the CRB until mid-2006, when they all topped and had a substantial correction. During the decline both Crude and the CRB entered OEW bear markets. But Gold held steady, and after a double bottom, started trending upward again. Gold rallied while the Dollar was declining into the end of 2004. When the Dollar rallied strongly in 2005, Gold was subdued at first, but continued to uptrend anyway. Certainly, Gold reacts to the Crude/CRB markets and to the Dollar/Euro relationship short term. But not longer term!
Historically, until the twentieth century, Gold was always considered to be money. Since it has always been in limited supply, and still is. The World drifted away from the Gold standard, and created a paper currency society that allows the currencies to float against each other. This approach has worked well, and has allowed the economies of the world to expand without any finite limitations. At times, some countries have been a bit reckless, and their currencies were devalued substantially by the marketplace. But for the most part, the paper money society works.
During the 1970's, when the paper currencies were getting their first real worldwide inflationary test. Gold, being of finite supply, was purchased as a hedge against inflation. That's when it hit $875. During the 1980's inflation was tempered, Gold dropped to under $300, and remained there for quite some time. Now that it has been in a prolonged bull market, many are again assuming that Gold is rising because of inflation. However, if one reviews the Bond market and its derivatives, inflationary expectations are quite limited. And, the world's currencies are probably the most stable they have ever been. But Gold continues to rise in value.
Since we came off the Gold standard thirty-odd years ago. The wealth of the world has grown geometrically. Congressional appropriations are commonly made in "billions" of Dollars, whereas not too long ago "millions" was the normal term. Our national budget is now termed in "trillions" of Dollars. In comparison, using historical standards, even at $600 Gold is cheap. As the price continues to rise, more and more Gold will be mined, as more difficult mines will become economically rewarding. Eventually, supply will overtake demand, Gold will enter a bear market, and then stabilze at a much higher price than the $300 level of recent years. It appears that Gold is rising in a bull market, as it works its way to achieving a more normalized price equilibrium, in todays marketplace. Let us not forget, our stock market has been in a bull market since late 2002, and the world's markets have been rising since early 2003. Worldwide economic wealth is growing everyday. The rise in Gold appears to be more related to worldwide economic wealth, than with inflation, or the currencies. Therefore, I would suggest that the rise in the price of Gold should be considered an economic positive, and not a negative. The bull market continues.