GoldMoney Alert - 20 October 2007

Gold Sets Another Record

Gold closed on Friday at $764, another 27-year high. It's the highest weekly close for gold since January 18, 1980. Gold closed that week at $812.00. The next day gold made its all-time record high close of $825.50, and then fell sharply - marking the end of the 1960-70's great bull market. Gold never again closed in the $800s.

Gold is rapidly approaching the $800s and that $825.50 high. Could it collapse again after reaching that price?

Anything of course is possible when it comes to markets, but our task is to focus on probabilities rather than possibilities. It is highly unlikely that gold is about to start another bear market. I put the probability about 1%.

There are just too many factors pushing gold higher, and perhaps most importantly of all, gold remains cheap. It is one of the few commodities that has not yet made a new record high.

While the $825.50 previous peak in gold may appear intimidating, we have to recognize that price was recorded in 1980-dollars, which had 1980-purchasing power. There have been 27 years of inflation since then. Adjusting for the loss of dollar purchasing power over those 27 years, gold today would need to reach $2,206 - and counting.

I add the "and counting" comment because the dollar is being inflated every day the Federal Reserve and the banks create more dollars than are demanded for trade and commerce. So if gold were to reach that $2,206 level at some future date, adjusting between now and then for future inflation, an even higher price will be needed to match that 1980 peak.

We can see from the above charts the different results between silver and gold. Gold has broken above its May 2006 high, but silver is still trading below it. This non-confirmation is not a reason for worry, but it does represent something we should be watching carefully. When silver finally breaks above $14.85, both precious metals will have resumed their major uptrends.

Meanwhile, the US Dollar Index closed the week at another record low.

What support for the dollar existed at the 78.50-80.50 level (marked by the red dotted lines on the above chart) now becomes overhead resistance. So if the dollar bounces from here, it's not likely to bounce too high. New selling will keep the dollar under pressure.

Published by GoldMoney
Copyright © 2007. All rights reserved.
Edited by James Turk

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