Is $800 Gold On the Way?

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Something certainly seems out of whack. Traditionally, the chief drivers of a rising gold price are a weak dollar and an outburst or the threat of inflation. But the dollar has strengthened, and inflation, most economists say, is low and presently contained. So in theory, gold – on those negative influences – should be weakening, not strengthening. Yet, early last week, it climbed above $500 an ounce, a 22-year high.


Why the seemingly contrary behavior? For some thoughts, I rang up a couple of the country’s more knowledgeable minds on precious metals, namely:


* Frank Holmes, chief investment officer of U.S. Global Investors, a San Antonio, Texas-based family of mutual funds with $3 billion of assets under management. Included are two that invest in gold, U.S. World Precious Metals Fund (assets: $300 million) and U.S. Gold Shares (assets: $90 million). Over the last three years, these two funds are up a blistering 40.1% and 29.9%, respectively.


* Paul Van Eeden, managing partner of Cranberry LLC, an investment company in Bellingham, Wash., specializing in gold and mineral exploration. He also writes a monthly online investment letter on precious metal investments (subscription is $1,985 a year).


Interestingly, both men see gold’s recent gains – about 20% from its closing 2003 price of $415.45 an ounce and 14% from last year’s wrap-up of $438.45 – as the forerunners of even bigger increases ahead. Gold closed Friday at $503.38, near a 23-year peak. “We’re seeing the beginning of a bull market in gold,” Mr. Van Eeden says. He believes its price will double from here in three to five years. If so, that would surpass gold’s all-time high of $850 an ounce in January 1980.


Mr. Holmes thinks the $1,000 mark could be reached even sooner, by 2007, he believes. Before then, though, he sees gold easily popping to $800 if there’s a spike in inflation or if interest rates peak and fall, which would mean a negative rate of return on cash after inflation and taxes. Based on current supply-demand factors, gold, he argues, should now sell at $600 an ounce.


Detailing his rationale for the recent run in gold, Mr. Holmes cites the following:


* Whenever inflation, as measured by the Consumer Price Index, is greater than the Federal Funds rate – which is currently the case – the price of gold tends to rise because of the negative return on cash. (The fed funds rate is now 4%; the CPI, 4.5%).


* Mine supply is falling, whereas demand from India, the world’s biggest buyer of gold for jewelry purposes, is up 50% from a year ago.


* Aside from buying bonds, oil-rich countries are increasingly recycling their petro-dollars into gold.


Gold, Mr. Holmes believes, still has a lot of catching up to do, versus other commodities. Ditto, he points out, American purchases of gold. In 1999, he notes, Americans bought 2 million 1-ounce gold coins; this year so far, only 400,000.


Mr. Van Eeden has always maintained that the price of gold is chiefly a function of the dollar exchange rate (the value of the greenback versus foreign currencies) and attributes a doubling in the price of gold since 2001 primarily to a weak dollar.


But gold’s more recent price acceleration, he believes, in part reflects uncertainty on several fronts. One area of uncertainty, he says, centers on the ramifications of America’s military weakness in Iraq, specifically, its failure to conclusively win the war. Another is the Federal Reserve’s decision, come March, to cease publishing M-3 data, which is the broadest measurement of money supply. This means, Mr. Van Eeden explains, an inability to look at the dollar’s inflation rate.


Renewed interest in gold on the part of central banks is seen as yet another recent stimulus for rising purchases of the precious metal. During the 1990s, Mr. Van Eeden points out, central banks were aggressive sellers of gold. In contrast, they’re now re-entering the gold market. For example, Russia’s central bank recently said it would double its gold reserves from 5% to 10%. Likewise, Argentina last year purchased 42 tons of gold.


Explaining his rationale for an ongoing bull market in gold, Mr. Van Eeden contends the dollar still has a long way to fall on foreign exchange markets. The Federal Reserve’s shenanigans can only postpone the inevitable, he says. However long it takes, he adds, the dollar exchange rate has to be corrected to reflect inflation and America’s deteriorating industrial competitiveness relative to Asian nations.


His favorite gold play for the average investor is StreeTracks Gold Shares ($50.32), a trust unit that trades on the New York Stock Exchange and tracks the price of gold on a percentage basis.


Whether the next major step for gold, as Mr. Holmes suggests, is $800 an ounce remains to be seen. But for now, at least, the bottom line is gold is golden again.


The New York Sun

© 2025 The New York Sun Company, LLC. All rights reserved.

Use of this site constitutes acceptance of our Terms of Use and Privacy Policy. The material on this site is protected by copyright law and may not be reproduced, distributed, transmitted, cached or otherwise used.

The New York Sun

Sign in or  Create a free account

or
By continuing you agree to our Privacy Policy and Terms of Use