Ken, what do you think about the falling dollar and the rising price of gold?
This is a very sophisticated question. I hear a lot of people saying gold is the currency of the future. Generally, the value of the dollar is lower because you have lower interest rates. When the value of the dollar goes down, the price of gold goes higher as a hedge for a lot of investors and institutions. Conversely, if rates go up, the value of the dollar goes higher and gold would, perhaps, go down because there is an inverse relationship.
It is very cyclical and right now we're going through a rate environment that keeps going down. Sometimes, when there is very low inflation, low interest rates are not enough to maintain the desired level of money supply. The Federal Reserve Bank is expected to implement a concept known as “quantitative easing” which includes the government buying up bonds and still trying to push rates down lower to stimulate the economy and demand.
While gold will go up under those conditions, interest rates will also start going higher, the economy will start to do better and you will, then notice gold start to pull back. One thing to note about gold is that it is not a building material like copper or other metals. Though gold is important – it is used as a way to hedge against currency – it is not used as a significant source in construction unless, of course, you are modeling your bathroom with gold fixtures.
Also, in the last several years gold has dramatically beat stocks and bonds. But, again, this is cyclical because over the last 10, 20, 30 years, stocks and bonds have generally performed better than gold.
Over the past several years gold has become very a popular investment but I would watch out from running with the herd. Again, it works well for awhile and the momentum is with gold right now but again I would caution anyone to try to follow past performance over the last couple years and characterize gold as the definite investment. If anything, a sophisticated investor will opt to pick up an investment that's out of favor and that's important to consider.
As far as whether I see gold as the currency of the future I don't think so. I don't think the currency of the future is gold because you still have other currencies from around the world; you'll still have the Euro, you’ll still have the sterling pound and you'll still have the dollar. With all these different currencies out there I don't think they're going to mold into that of gold.
Finally, and as an aside, I want to comment on the comparison of BRIC (an acronym for the combined economies of Brazil, Russia, India and China) versus PIIGS (an acronym used to refer to the five Eurozone nations – Portugal, Italy, Ireland and Spain). A lot of attention has been paid to PIIGS as all have debt issues and other economic problems in their respective countries. What we don't hear enough about is BRIC where the largest amount of growth is in the world. If you put it together, basically, you have PIIGS versus BRIC - PIIGS and debt bringing down the rest of the world versus BRIC and growth bringing up the rest of the world.
