A Few Supply and Demand Fundamentals of the Dollar and Gold
Jason Hommel
Argentina's peso crisis has highlighted a seldom
discussed phenomenon in supply and demand analysis. One writer pointed
this out, but I read from so many sources, I forgot to remember who
said the following: The supply of the peso actually shrank, but demand
collapsed faster, causing massive inflation, as the peso is now worth
less than 1/4 of what it used to. That's right, money supply shrank
during inflation! The politicians tried to limit peso supply by
limiting bank withdrawals, but it did not work. Demand fell much faster
than supply.
When analysts typically talk about the dollar, they
usually focus only on the supply side, or how fast M3 is growing, or
what the interest rates are. They forget that demand is the other part
of the equation because they usually speak as if dollar investment
demand is a constant. True, often in the circles of gold bugs, we will
read about factors that may change the demand for dollars depending on
what the world does. Foreigners have a strong investment demand for the
dollar which they need for various reasons such as to buy oil, or make
stock purchases, or repay IMF loans, or just to hold it as it remains
stronger than their own fiat money. But this dollar demand could also
wane.
The point is that we too, like Argentina, could
undergo a time when dollars are in much reduced supply, and nobody
wants them!
So, keep these facts about supply/demand analysis in
mind while we consider recent big news in the gold market:
1. Demand for gold is rapidly increasing in Japan,
Germany, and now India is buying again at $310/oz., all at the same
time. India buying at $310 is huge news because India usually buys on
the dips, and stops buying when the price rises. India also buys about
1/3 to 1/4 of the gold mined each year, so the price at which they buy
is extremely significant. The fact that India is now buying gold again
at these high prices was brought to my attention in an article by David
Walker on May 1, 2002, which you may have already read if you read
enough commentary on the gold market. There is also a supply crunch in
the gold market, as production by the mines is mostly down or flat
overall, and supply is down as mining companies buy back gold to close
out their hedge books. Those two factors, both reduced supply and
increased demand for gold alone will work together to cause gold to
increase in value.
2. Regarding the dollar price of gold, the majority
consensus of politicians, businessmen, and media reports now all seem
to strongly indicate that we are quickly headed for a collapse of the
dollar of about 25% of its purchasing power. There were also many media
reports prior to Argentina's collapse. If only the warnings were
heeded! I feel that these reports are a reliable enough indicator that
we can soon expect that every dollar will soon be worth only about 75
cents internationally. This alone could push up the price of gold very
swiftly to $413/oz. from $310, and this does not take into account the
supply/demand factors (mostly being driven by nations that do not use
dollars) which will cause the price of gold to move up on its own.
3. With the coming dollar collapse, we could also
quickly see increased investment demand for Gold from the U.S.
consumer/investor. This would actually manifest itself as a reduced
demand for dollars. We could end up in a situation of massive deflation
(dollar destruction) as major firms continue to destroy dollar capital
through bankruptcies. Meanwhile we could watch Greenspan try to "put on
the brakes" of inflation and reduce the supply of dollars through
rising interest rates. But investors could easily jump ship out of U.S.
equities and bonds and spend their dollars on gold much faster than
Greenspan could destroy the dollars, similar to what happened in
Argentina.
We are already seeing the beginning of this cycle of
dollar destruction beginning to take shape. Greenspan is creating money
like crazy as M3 is skyrocketing at 15-20% annually. Soon, he will have
to raise interest rates to put the brakes on this money creation type
of inflation. Large firms have gone bankrupt. Large firms are having
their credit ratings cut as they are heavy in debt and continue to lose
money in operations with no earnings. Interest rate increases will
squeeze debt-laden corporations to death. Investors are now
increasingly looking at gold as it is the only market that is up. Yet,
we are still in the very beginnings of a gold bull market as gold funds
have still not yet reported significant inflows of new capital.
The way I see it, the mighty dam holding back the
waters of dollars and other currencies is leaking, and that the waters
in a tiny puddle below the dam in the gold market is rising. I believe
it is a terrible mistake to look at the rapidly rising puddle in the
gold market and conclude that the gold market is overvalued at this
time based solely on the recent run up. Get ready for a flood of fiat
currencies into gold.
May 6, 2002
Disclaimer: I am not a licensed investment advisor.
I am not a broker. I hold substantial positions in precious metals and
stocks of companies that invest in precious metals. I stand to
personally benefit from any rise in the price of precious metals. I am
biased against what I consider to be the fraud of fiat money. I am
biased against the fraudulent practice of creating money out of
nothing. I am biased against debt, particularly when money is lent at
any interest rate whatsoever, a practice called usury.
For a list of many reasons why I believe now is a
good time to buy gold and silver, see my web site at www.goldismoney.com
Jason Hommel can be reached for further comment at bibleprophesy@yahoo.com
Other essays by Jason Hommel:
25 Reasons To Support The Sound Money Bill - 08 July 2004
I'm Insanely Bullish On Silver - 19 June 2004
Silver Stock Evaluations - 22 May 2004
The Silver Bull Is Back - 04 May 2004
Late April Silver Update - 22 April 2004
Silver Juniors With Cash Flow - 04 March 2004
Major Frauds of the U.S. Monetary System - 26 February 2004
Market Perspective & Cabo Mining - 12 February 2004
Usury Enslaves - 19 January 2004
Sterling Mining - 29 December 2003
The U.S. Trade Advantage With China - 17 December 2003
Rising Gold Prices Will Help The Economy - 02 December 2003
Miners to Use Silver as Cash - 27 November 2003
Private Placements in Silver Companies - 20 November 2003
Is the Silver Market Too Small to Buy? - 13 November 2003
Inflation & Deflation During Hyperinflation - 06 November 2003
Silver Price Expectations of Silver Stock Investors - 30 October 2003
Buying & Tracking Canadian Silver Stocks - 29 October 2003
Canadian Zinc--Silver Potential - 23 October 2003
Silver Stocks--Comparative Valuations - 4 - 13 October 2003
Silver Stocks--Comparative Valuations - 3 - 06 October 2003
Silver Stocks--Comparative Valuations - 2 - 29 September 2003
Silver Stocks--Comparative Valuations - 1 - 22 September 2003
Silver and Cardero Resource - 08 February 2003
The Moral Failures of the Paper Longs - 22 January 2003
CFTC Response to Silver Problem - 14 January 2003
People Talking About $32,567/oz - 10 January 2003
Letter To Authorities of Silver Markets - 06 January 2003
Why no talk of $32,567/oz ? - 02 January 2003
Refuting Myths about Gold - 28 October 2002
Controlling Gold with Paper - 10 June 2002
Impending Gold Futures Default - 29 May 2002
Certain gold stocks are still cheap - 07 May 2002
A Few Supply and Demand Fundamentals of the Dollar and Gold - 06 May 2002
New DROOY Institutional Holdings - 21 February 2002
Hommels View of Gold - 23 March 2001
Gold Price Under Differing Scenarios - 24 June 2000
Goldismoney.com
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