[PEN-L] gold and malaise

[Sandwichman]

I was going to send a question to pen-l wondering why nothing has come up about the run up in the gold price since last fall. I have to kick myself because last October, when Inco announced a take over bid for Falconbridge, I thought to myself "time to buy gold." I didn't and the gold price has gone up over 50% since then. The notion had to do with research I did in the late 1970s on metal prices and commodities in general at that time. There seems to be a pattern repeating itself.

To go slightly out on a limb here, it seems to me that what is happening with commodity prices now is somewhat of a spill-over from foreign exchange imbalances. Those imbalances are being prevented from "correcting" themselves because of government intervention to maintain "orderly" exchange rates. China and Japan can buy dollars to keep their currencies from appreciating against the dollar. But they can't -- or wouldn't want to -- dump untold quantities of precious metals into the bottomless pit of US current-account deficits. In fact, China and India are reported to be buying gold.

My recall is that a process began in the late 1970s with a run up of commodities prices, particularly metals (which is, at any rate, a lagging cyclical indicator). This eventually started to manifest in accelerating inflation and intense pressure on the US dollar, both of which were countered by Volcker's draconian interest rate hikes (which eventually played out in a deep recession). The weakness of the dollar was dramatized by the extraordinary spike in the gold price, which peaked at $850 in 1980 This was about the time of Carter's "malaise" episode. Iran was very much in the news at that time, too.

So yesterday the price of gold gained 1% after breaching the $700 dollar mark and today it was up another 2%. What do pen-l'ers think about this?

--
Sandwichman