Courtesy of the AGORACOM Blog:

Gold Hits $866 As Investors See Checkmate Coming For US Fed

For those of you that haven’t taken a serious look at gold and related stocks (and there are many of you out there), gold just hit a new all-time high of $866 this morning. The previous high was $850 in 1980 - but after adjusting for inflation, gold needs to hit $2,079 to hit a true all-time high - and many believe that is exactly where gold is going.

I’m not sure about $2,079 but I give gold a 40% chance of breaking through $1,000 in 2008. Why? The US Fed. Specifically, real estate prices in the US are getting crushed and that is only going to get worse thanks to the lack of credit liquidity. Furthermore, take a look at the value of US real estate inventory below:

No credit and nobody is buying … anybody want to guess what the Fed will have to do in 2008? Yep, cut slash interest rates. Interest rate cut = Cheaper US Dollar = Higher Gold Prices. It is that simple.

But there is more.

The US is also fighting inflation. Unfortunately, you can’t fight inflation and a credit liquidity crisis at the same time. Fighting one only makes the other problem worse. In this case, cutting interest rates will also lead to higher inflation. Afterall, the purpose of interest rate cuts is to get people to spend. Anybody want to guess what happens to gold when inflation starts climbing?

If you are a chess player, you understand the analogy that the Fed is about to sacrifice its Queen to save the King. Unfortunately, cutting interest rates to help save the real estate market is only going to delay the inevitable pain the US economy must suffer for years of excess and greed. They have picked their poison and thy name is inflation. Checkmate.

Regards,
George