Is it the U.S. dollar? Is it oil prices? What is it?
Oh my, how quickly things change in the new global economy. A few weeks ago, investors were all but ready to give up on their gold stocks. Then, bang! Gold stocks start rising rapidly again.
In fact, in less than two weeks, gold stocks have regained what ground they lost over four months. Yes, higher oil prices could be to blame (or thank, depending on how you look at it). Maybe the recent media articles concerning general consumer debt overload are playing a factor.
But to this simple economist, the key is the weakness of the U.S. dollar. As I have written about extensively in the past, the U.S. dollar will eventually decline in value against other world currencies because it’s in the best interest of the U.S. to have a long-term low dollar valuation. A weak U.S. dollar hinders imports, which hinders deflation, which creates badly needed domestic jobs.
In addition, our economy is not doing as well as we have been led to believe. We can easily see this in corporate earnings, poor employment, and lack of growth. This may cause Greenspan to abandon his “measured” interest rate increases — not now — but a few months down the road. Why own U.S. dollars that pay so little when pounds and other dollars pay much higher returns?
Finally, there’s our out-of-control debt. Do you want to own the currency of a country where the government is working in a deficit position that is only getting worse?
Little by little, the world is figuring out that America just keeps printing more money as it needs it. This is important: We don’t use machines and hard labor to dig and mine for dollars like we do for gold, we just simply print on demand. But the U.S. has done such a great job at snowballing 70% of foreign central banks that the U.S. dollar, and not gold, is the official reserve of many currencies. Our printed money backs hundreds of foreign countries’ currencies. What are those poor buggers supposed to do as the U.S. dollar starts to contract? Reduce their own money supply? It’s a catastrophe waiting to happen.
All this bodes well for gold, as gold will be a strong first alternative to the U.S. dollar for investors. But the decline in the U.S. dollar will not be a straight line. Like all trends, it will be choppy with mini-bulls within the general decline. It’s the long-term trend for the U.S. dollar we’re concerned with. That trend is down, and Warren Buffett is betting billions on it.
I haven’t sold any of my gold stocks because they are in the hands of patience. I don’t trade in and out of gold stocks because it’s tough to make money at that game. My gold investments are a hedge against my paper investments, as I truly believe the long-term decline in the U.S. dollar will work wonders for gold and gold stocks.