The price of gold closed in London at $995 per ounce on March 13, the highest since 1980, and considerably above its most recent peak in May 2006. However, as shown in the chart below, the price of gold in euros had barely returned to is May 2006 level by October 2007–the surge in the dollar price of gold between October 2006 and October 2007 was mainly a reflection of the decrease in the foreign exchange value of the dollar.
The run-up of the price of gold between October 2006 and October 2007 differed from that during, say, the 12 months ended May 2006 and the four months ending February 2008, when the price of gold increased in both dollars and euros (as well as other major currencies), which indicated that investors were providing against an acceleration of the loss of purchasing power of all paper money, i.e., that they have come to expect higher rates of general price inflation here and abroad.
In other words, the return to $800 gold (the level reached in October 2007) did not appear to have involved any sudden tendency toward a flight from currency. The relatively steady euro price of gold prior to that time suggests that overall demand had remained strong as the increasing prosperity of China and India (as well as the current high oil price) had boosted the purchasing power among groups in Asia and the Middle East with long-standing traditions of holding gold as a store of value. The run up to to $1,000 since October 2007 has coincided with a sharp increase in the Euro price of gold — suggestive of a recent strong flight from currency.
As for supply, it will be several years before mining projects that were “mothballed” when the price of gold was low can be brought on stream. However, if the price of gold continues to increase markedly, it can be expected that the world’s central banks, which still hold approximately half of all gold that is in “good delivery” form, will at some point become tempted to become sellers. In other words, we have no way of determining how long the “bull market” in gold will last, and neither does anyone else. As we have often stated, the reason to own gold is not to make money, but to have money in any and all circumstances.
