The Case for $1300/Oz Gold

In October 2007, when gold was USD 750/oz and a US dollar fetched 7.5 Chinese renminbi yuan [RMB], I published an article titled “Gold and RMB – Last Shoe to Drop for the dollar”, in which I said:

For a US family that spends $300 to $500 a month on Chinese goods, a further 40% appreciation of the RMB will translate into a $100 to $200 monthly cost increase. The logic of asking the Chinese to revalue their currency upwards is no different from asking the Saudi’s to jack up their oil price further, which is no logic at all for a US consumer. Holding Dollars is like playing musical chairs. When the music stops, the one holding the most Green IOUs, loses.

With a rapidly sinking Dollar vs. western currencies, the Dollar’s supreme image is now very wobbly. Having built up a war chest of USD 1 trillion, the Chinese need no more Dollars to shore up confidence in its own paper within the international arena Combining these two factors, the Chinese government will likely loosen the RMB peg to the Dollar at a faster pace, and we expect a minimum of 20% appreciation in RMB over the Dollar (i.e 5-6 RMB to 1 USD) in the next 12 to 18 months. Gold is international money, and will follow the RMB’s suit and climb to over $1,000/oz over the same period. This gold target is a conservative estimate given that other commodities from oil to copper have all quadrupled from their lows this decade. Gold’s low was $250/oz in 2001.

Gold and the RMB’s rise will be the final chapter to the Dollar’s status as the world’s reserve currency, and the end to an era of low priced Walmart goods made in China. Now, 7 months later:

The RMB has since appreciated at the fastest 6-month pace on record, up over 7% and cracked through the psychological 7 RMB/USD barrier to trade at 6.95 RMB/USD. The talk of demanding the Chinese to revalue their currency has all but disappeared.

Gold met our 12 month target in 4 months and surpassed USD 1,000/oz in March 2008.

Fast-rising commodity prices and appreciating RMB are putting pushing up prices of everything measured in USD. Unheard of in the past decade, computer prices are going up for the first time in recent memory.

Let’s do an experiment: If we fix the RMB-denominated gold price constant at today’s closing of RMB 6,425/oz, the price of gold will reach USD 1,285/oz should RMB reach our target of 5 RMB to 1 USD by the end of 2009.

There are those who predict a rebound of the dollar index and a protracted USD 800/oz gold price or even lower. They just don’t get the message. Gold is an international market. Physical gold demand is mostly from Asia and as long as Asian currencies keep strengthening, the USD-denominated gold price will keep going up, regardless of what happens to the US dollar index.

Our 2009 gold target of USD 1,300/oz does not factor in external elements such as geo-politics or the speculative herd-following frenzy. I have a feeling this once-unthinkable 4-digit target will turn out to be too conservative.

Having built up a war chest of USD 1 trillion, the Chinese need no more Dollars to shore up confidence in its own paper within the international arena Combining these two factors, the Chinese government will likely loosen the RMB peg to the Dollar at a faster pace, and we expect a minimum of 20% appreciation in RMB over the Dollar (i.e 5-6 RMB to 1 USD) in the next 12 to 18 months.

If the driving force behind this predicted rise in gold is a rise in the yuan to dollar exchange rate, why not just buy yuan futures? For one thing, it would require committing far less capital, leaving the bulk of your money to real investments (since gold is not technically an investment and doesn't provide income).

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