Gold
The gold price ($628. oz.) is in a seasonally strong period
presently. This interval normally lasts through late Jan. /
early Feb. of the succeeding year. For the current rally in
gold to have any real "pop" short term, it needs to take out
overhead in the $640-650 oz. area. Sluggish oil and industrial
commodities prices probably have inhibited speculation so far.
My gold macro-model has gold fairly valued now at $520. I can
make a decent case for gold to go to $550 by yearend 2007, so
gold bugs and bulls will have to look elsewhere for a rationale
for the current price, much less a sharply higher one. Reasoning
from my model, gold made a blow-off top just above $730 this year
reflecting the culmination of a lengthy period of inflationary
monetary policy by the Fed that dates back to the late 1990s.
Since the end of 2004, monetary policy in terms of monetary
liquidity growth has been tight. My view is that the Fed will
keep policy firm for as long as it can next year, before easing
to pave the way for a stronger economy in 2008. So, that leaves
me suggesting that there could be large but temporary downside
price risk in gold after the seasonally strong period winds up
later this winter.
US Dollar
I have a simplistic view on the dollar: If folks in the US should
not hold dollars, neither should foreigners. You can put dollars
to work now at no or nominal risk and earn 5.25%. That translates
into a positive after tax return adjusted for inflation. Moreover,
the Fed has kept the printing press in the "slow go" mode now
for nearly two years. Domestically, the dollar is fine. This
contrasts sharply with mid-2004, when short rates were 1.00%,
inflation was accelerating and the Fed was only just entering into
tightening mode. From my perspective, it makes little economic
sense for foreigners to dump dollars now.
Looking at 2007, it may well be that dollar fundamentals slip some
later in the back half of the year, but this slippage may be
modest.
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