Leave it to Switzerland's version of Dr. Doom to make the latest apocalyptic pronouncement on the future of the U.S. dollar -- and the outlook for gold prices.
Marc Faber, investment advisor and fund manager to the uber-wealthy, says gold will forever stay above $1,000 an ounce. If you're unfamiliar with Faber's pitch-black outlook for the future of the Western economies and the developed world in general, well, he's probably best known as the author of the Gloom, Boom & Doom report.
"We will not see less than the $1,000 level again," Faber said at a conference in London, Bloomberg reported Thursday. "Central banks are all the same. They are printers. Gold is maybe cheaper today than in 2001, given the interest rates. You have to own physical gold."
Also bolstering gold prices will be the Beast of the East, according to Faber. "China's demand for commodities [including gold] will go up and up and up," Faber said, Bloomberg reported.
With the yellow metal now trading at nominal record highs of more than $1,100 an ounce, gold bugs have been laughing all the way to Fort Knox. Gold is up about 27% on the year and about 50% in the last 52-weeks.
(The ductile metal would still need to more than double to reach a true all-time high because of a little thing called, ahem, inflation. Why we talk about an inflation hedge without adjusting for inflation is a mystery.)
It's All About the Benjamins
So why has gold been such a sterling investment? (Silver has done even better, by the way.) Because gold is the classic hedge against global inflation (central banks are printing gazillions of dollars as part of their stimulus programs, making fears of future inflation run rampant). More important, gold is denominated in dollars. Any time something is denominated in greenbacks -- like gold or oil -- its price goes up as the buck falls.
Now in case you haven't noticed, the buck is not just falling, it's burning. The U.S. Dollar Index, which measures the greenback against a basket of major currencies, is at a 15-month low and looks to have nowhere to go but down.
As we've written again -- and again -- as long as the Federal Reserve continues to print money through a zero-interest-rate policy, the U.S. continues to run a big trade deficit and other nations move their foreign exchange reserves out of dollars, the buck will remain feeble. After all, if you're a foreign central bank, pension fund, mutual fund or hedge fund, why would you hold onto a massive stash of rapidly depreciating dollars?
If you're India, well, you wouldn't. The nation's central bank purchased almost $7 billion worth of gold from the International Monetary Fund last week, helping to propel prices to their current levels.
What Goes Up . . .
Maybe Faber is right and gold-floor $1,000 is here to stay -- but it's a pretty bold statement. At some point the Fed will have to raise rates. (Let's hope so, anyway, if only because it would mean the economy is growing and unemployment is shrinking.)
Then there's the problem that the weak dollar is traumatic for our trading partners, since a weak dollar makes it harder for them to sell us their stuff. Fed chairman Ben Bernanke apparently doesn't get paid to worry about what governments elsewhere think, and so those governments have begun to take matters into their own hands. Thailand, South Korea, Russia and the Philippines have been sucking up dollars to stop its nauseating slide, The Wall Street Journal reported Thursday.
And if China gets into the act? The call on gold-floor $1,000 could look very foolish, indeed.
Lest we forget, gold is like everything else in the history of commerce: It is worth only what you can get someone else to pay for it.
Gold prices have been known to go down, too, you know.
Learn the most important step in structuring an investment portfolio.View Course »