The gold price has been toying with the magical $1000 level for more than a week, rekindling interest from both gold bulls and gold bears. With the price up more than 16 percent in US dollar terms since April, investors are asking why gold is going up and if it will continue its upward path.

According to Dr Prieur du Plessis, Plexus group chairman, gold has been rising steadily over the past eight years. "Few people realise that gold in dollars has outperformed the US stock market fourfold over this period, even with the reinvestment of dividends," he says.

US investment icon Richard Russell of the Dow Theory Letters fame recently published a graph of the weekly Dow-to-gold ratio, a graph that gold-haters are loath to acknowledge. The graph shows that since August 1999 the Dow has lost 80 percent of its value against real money, namely gold. In 1999, one share of the Dow would buy over 44 ounces of gold. Today the Dow will buy only 9.54 ounces of gold. There is no way of telling how low this ratio will go, but Russell believes it could drop to below five.

Printing money good for gold

Gold bulls believe the gold price is increasing mainly due to investors’ expectations of rising inflation. Gold predicts inflation because of the relentless wave of money the US Federal Reserve and other central banks are printing and pumping into the system to reignite economic growth and, more importantly, stem the possibility of a global depression and deflation. While Du Plessis believes this may be so, he is aware that the correlation between gold and inflation in the US over the last 25-plus years has been zero.

Legendary US hedge-fund guru John Mauldin believes the rise in gold above $1000 does not indicate the future of inflation. In his opinion, if the Fed were to withdraw from the current economic battle, the forces of deflation would be felt in short order. Mauldin contends the answer to the question 'Will we have inflation in our future?' is 'You better hope so!'

Du Plessis agrees with Mauldin’s belief that the value of gold is rising against most major fiat (paper) currencies because it is considered a neutral currency. According to Mauldin, the Fed and the Obama administration seem to be pursuing policies that are dollar negative, and give no hint of letting up.

Rising in most currencies

"The declining dollar has been one of the main catalysts for gold’s rise. Although the gold price recently reached new highs in dollar terms, it is important to note that the gold price has also been rising in most other major currencies since mid-2007," adds Du Plessis.

Du Plessis believes another driver of the rising gold price is China’s loss of confidence in the US dollar. "The Chinese are concerned about their large exposure to the US dollar (most of their foreign reserve holdings are invested in US bonds) and have been diversifying into other currencies such as the euro and yen, as well as gold and other commodities," he says.

"It was recently announced that China has doubled its gold reserves to 1054 tonnes in the last few years. This makes that country the world's fifth-largest holder of gold, just ahead of Switzerland, and among the six nations plus the International Monetary Fund that have reserves of more than 1000 metric tons," says Du Plessis.

Article continues on page two, Editor's note on page three...

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