fishsupreme

Gold's up to $1250 an ounce, pretty much a record (though not in inflation-adjusted dollars -- $700 in 1980 was a lot more than $1250 today.) A lot of people seem to be taking gold's rocket-like price increase as a reason to buy more gold.

However, I think it's near-peak at this point (though it may go up another $100 first), for two reasons:

1.) The media: A month ago, if you watched a news channel, every commercial break was filled with companies that wanted to buy your gold. They were all exhorting you to take advantage of the high gold prices and send gold to them for cash. Yesterday, every commercial break in the news was filled with companies who want to sell you gold. Invest in gold! It's at record high prices and still going up! This tells me that the gold brokers & dealers have switched modes from trying to get in to trying to get out. Oh, also this.

2.) Exchange rates: There are only three reserve currencies in the world -- the dollar, the yen, and the euro. It's not because other currencies are "worse" or less trustworthy; indeed, as fiat money, none of the reserve currencies are objectively very "good." They're reserve currencies (currencies that world governments & major institutional investors put their money in) simply because there are so many of them -- if you buy 50 billion dollars or euros, the dollar or euro is still worth the same amount it was when you bought them. If you buy 50 billion dollars worth of Guatemalan quetzals, you'll actually drive up the price of the currency by your own actions! (Well, unless the quetzal is pegged to the dollar, which I think it is, but that's beside the point.)

The euro's rise against the dollar since its inception is really due to the fact that the euro became a viable reserve currency and governments & companies wanted to diversify. But with the Greek debt crisis, which may spread to other countries, faith in the stability of the euro is waning, which may cause a capital flight -- which has nowhere to go except the dollar and the yen. You'd think it could also go to gold, but it really can't -- there's just not enough gold on Earth (all the gold ever mined is worth about $6 trillion at today's price.)

If institutions flee from the euro, they'll flee to the dollar, which will drive its price up, thus (indirectly) lowering the price of gold denominated in dollars. (Actually, if I knew a way to short the euro against gold I'd be quite tempted to invest in it.) The euro's already down to about $1.27, and I expect it to fall closer to $1.17 in the next couple months.

I find it interesting how everything is connected in the global economy. Interestingly, there is one other currency with the circulation volume to be a legitimate reserve currency -- the Chinese renmimbi. This will be even more true in a few years, since by the end of the decade China will become the largest economy in the world. However, the renmimbi is currently unusable as a reserve currency for other reasons -- for one, the government puts restrictions on the free flow of capital in and out of the country, which makes is totally unacceptable for, say, governments who want to store money. They also manipulate the exchange rate to peg it to the dollar (so as to keep Chinese exports cheap) and have a primitive bond market. If China relaxes these currency controls over the next decade, though, it could collapse the value of the dollar.

On the other hand, that's a decade away, and right now the dollar is looking pretty good simply because the euro is looking so bad. Next year might be a good, cheap time to take a trip to Europe.