December 17, 2007 – One year ago in Letter No. 375 I provided my forecasts for 2007. It’s time to repeat that task. Hopefully my forecasts for this year will prove as satisfactory as they were for this past year, because overall I think 2007 unfolded pretty much as I expected. But first, I’ll take a look back.
I got some things right, but some things wrong too. I’ll start this recap with my misses. There are two:
(1) “The US in 2007 will move closer to implementing – and perhaps even impose – capital controls. These will restrict your freedom to do what you want with your money. In particular, they may prevent you from getting your money outside of the US by restricting the conversion of dollars into foreign currencies, and perhaps even prevent you from buying gold and silver outside the US.”
I still to expect capital controls to be imposed, but it hasn’t happened yet. But maybe this wasn’t entirely a miss either, because one could argue that the US is indeed moving ever closer to capital controls as the dollar weakens.
What’s more, some countries have announced plans to control the flow of dollars, to prevent dollar ‘hot money’ from disrupting their local economy. There have been news reports that even the European Union has been considering some type of capital control in order to deal with the weak US dollar, particularly given the financial problems at Airbus.
In any case, capital controls were not imposed in 2007, but don’t rule them out. They are inevitable in my view unless the federal government does something to put the dollar on the right path, instead of its present one, which is the road to the fiat currency graveyard.
(2) I was dead wrong about silver. “…silver will climb faster than gold (i.e., their ratio will continue to fall). Their ratio will probably drop below 30, meaning it will take less than 30 ounces of silver to buy one ounce of gold. A $900 gold price and 30-to-1 ratio means I am expecting silver to reach $30 in 2007.”
Silver of course never got close to $20, let alone $30. Also, the gold/silver ratio has risen this year, not fallen. It was 49.7 at year-end, and presently is 57.4.
These were serious errors, but are mitigated by the fact that I got the direction in price right. The price of silver rose, but just far less than I was expecting.
On the plus side, here’s what I got right, or nearly right, in my forecasts for 2007.
(1) “Get your money out of the dollar and even out of the US in order to obtain some international diversification… the US economy is headed for a severe slowdown and recession. Housing and the US auto industry are the obvious weak spots. An economic adjustment will come regardless of whether or not capital controls are imposed because the assumption of new debt and the creation of financial derivatives have been so excessive.”
(2) “The dollar is headed lower but attempts will be made to prevent it from falling off the table by some type of capital control(s).” This one is partly right. Central bank intervention and propaganda that the US government has a “strong dollar” policy, kept the dollar from falling off the end of the table, but it has indeed fallen. The US Dollar Index fell into record low territory from 83.72 to as low as 74.86. It presently is at 77.44
(3) “My initial [gold] target for 2007 is $900, which I expect to see in the first quarter. Thereafter, gold will head toward 4-digits, and I consider a 4-digit gold price to be at least a 50% probability in 2007 and an 80% probability by June 30, 2008.”
While I got the direction for gold right, I was too optimistic. Actually, it’s not accurate to say that I was too optimistic. Rather, I continue to underestimate the power of the gold cartel. They’ve been able to keep gold suppressed over the years for much longer than I have expected. Though they are losing the war, their ongoing battles show that they have more fight than I thought possible.
In any case, I consider this forecast close enough to the mark to be counted as a success, particularly because I stuck to my guns that $800 would be achieved this year even as late as August when gold and the mining shares were being smacked down. In any case, the actual $835.20 high was only 7.8% below my target.
The forecast for the 4-digit gold price is still open. But I think it remains on track, with an 80% probability by June 30th being very realistic.
(4) “My minimum target for the XAU Index is 220.” One could say it was a miss, because the highest the XAU reached was 193.17, so I missed my minimum target by 13.9%. But that’s pretty close in my view, and underperformance of the XAU was explained during the year – mainly high oil prices, high inflation.
So that was last year, and here’s how I see it for 2008.
(1) Gold will finally break into 4-digits, which will be an event that gains worldwide attention. I think the high in 2008 will be $1,500, and the low will be $780. Gold will probably end the year at $1200-$1300, generating at least a 50% gain in 2008.
The same monetary problems driving gold higher for the past six years continue, including: (1) the dollar will continue to decline, threatening its 6-decade global monetary stranglehold as the world’s reserve currency, (2) inflation will worsen as the price of commodities as well as other goods and services rises, (3) the federal government budget deficit will grow, further debasing the dollar, and (4) global trade imbalances will continue to create huge pools of hot-money looking for a safe home, much of which will end up in gold.
Add to the above monetary problems a new worry – counter-party risk. This risk was highlighted by the bank-run at Northern Rock, and the depositor withdrawals presently underway in some institutional money-market funds in the US. Funds and more financial institutions will collapse in 2008, further highlighting this growing counter-party risk. Gold will benefit from this turmoil because it is the only money without counterparty risk – its value is not based on the promise of some financial institution. Gold is a tangible asset, not an IOU of some financial institution. This attribute of gold will become more widely recognized in 2008, significantly increasing worldwide demand for gold and causing its price to rise to my forecast high of $1,500, probably as the result of a collapse in the dollar or the collapse of some fund or major financial institution..
In summary, the global monetary system is under growing stress to correct the imprudent excesses of credit expansion over the past many years. In other words, we’ve had the boom, so the inevitable bust must now follow. And while some of the financial problems in 2007 make clear the bust is underway, the unfortunate news is that the bust has only begun. It will get much worse in 2008, making gold the premier asset of choice.
(2) Silver will clear $30 in 2008, as the ratio falls below 40. A $1200 gold price and 40-to-1 ratio puts the price of silver at $30. Silver is the best play for 2008, but silver is never a smooth ride. It comes with a lot of risk (and keep in mind how far off the mark I was about silver this year).
(3) The XAU Index will nearly double, closing over 300 at some point during the year.
I would like to conclude these forecasts with one more observation from last year’s forecast letter. In fact, it is such an important point, I mention it often.
“Gold is not an investment; it is money. Gold is not an investment because it is not a wealth producing franchise like a company. You can’t in essence purchase anymore crude oil with a gram of gold than you could seven years ago. Gold has not generated any ‘return’. What many people call the ‘rate of return’ of gold is in reality, the rate of depreciation of the US dollar.” This point is made clear by the following table.
Crude Oil Price
While gold has risen 16.8% on average for the last seven years, so has crude oil. In fact, the price of many goods and services has risen even more than gold.
The above table indicates one other thing. Gold is in a major bull market, which means that the dollar is in a major bear market. The dollar is losing purchasing power day after day because of debasement and inflation. The dollar remains on the road to the fiat currency graveyard. Continue to avoid it.