TOPICS > Economy

Dollar’s Weakness Inspires Modern-day Gold Rush

November 25, 2009 at 12:00 AM EDT
Loading the player...
As part of his series Making Sense of the financial crisis, Paul Solman looks at how the dollar's weakness has spurred a new gold rush.
LISTEN SEE PODCASTS

TRANSCRIPT

MAN: I love gold, so I like to surround myself with gold.

PAUL SOLMAN: The latest California gold rush: the Hard Assets Investment Conference in San Francisco. The glittering metal had hit $1,100 an ounce and was bringing its enthusiasts out of them thar hills.

MAN: This is 44-karat gold plate here. Isn’t that pretty cool? That’s pretty awesome, right? This is a quarter-ounce gold American Eagle bullion coin, which is 24 karat. This one here is a half-ounce gold American Eagle proof coin. It was actually made by the U.S. Mint.

MAN: Hi. Can you tell me something about you company?

PAUL SOLMAN: Folks like Jim Luthi think hard assets like gold are all that glitters in a world of proliferating paper money.

MAN: Governments around the world are printing money, and especially in the U.S.

PAUL SOLMAN: Printing money for stimulus packages and bank bailouts worldwide, that is, and especially printing dollars, raising the specter of inflation in America…

MAN: This particular sample has — has 15 ounces of gold.

PAUL SOLMAN: … and a higher gold price, as investors buy the metal to protect themselves.

Toronto’s Ian McAvity has long been attracted to the hard stuff. Some may recognize him from PBS’ “Wall Street Week” back in the early ’80s, when gold was last making headlines.

IAN MCAVITY, EDITOR, Deliberations on World Markets: I’m a Canadian, and I’m watching the United States from the outside. I have U.S. dollars — not many — and I’m an analyst of international capital and international flows. Everything that this country is doing is basically telling me that you’re going to depreciate the value of those U.S. dollars over time.

PAUL SOLMAN: The fear is that creating more dollars will drive their value down and down. A slow economy, however, has meant less spending, less borrowing, and thus fewer dollars circulating, ever since September of 2008, when we first visited Charlie Mammoser’s Northern California Coin Exchange.

CHARLIE MAMMOSER: Right now, we’re in a down trend. Gold is $750.10.

PAUL SOLMAN: So, gold reflected the fear of deflation, prices going down, the dollar going up, just 14 months ago. But it’s not true any more.

CHARLIE MAMMOSER: Yes, it’s been a heck of a year. It’s been a wild ride.

PAUL SOLMAN: The man who brought us here, devout gold bug John Williams. The past year has validated what he’s long believed.

JOHN WILLIAMS, ShadowStats.com: Gold was a good buy at $200, a good buy at $500, a good buy at $750. We’re over $1,100. That’s still a good buy. It’s going to be a good buy at $5,000.

Gold versus the dollar

PAUL SOLMAN: You don't actually think gold is going to get to $5,000 an ounce?

JOHN WILLIAMS: Oh, indeed I do. But what has happened increasingly is, the rest of the world has seen, hey, there's a problem with the United States, that they're spending like a -- like a drunken sailor. I don't want to hold the dollars. I'm going to lose here.

PAUL SOLMAN: A case in point, what India did just last month, buying gold from the International Monetary Fund.

Currency analyst Greg Salvaggio:

GREG SALVAGGIO, Tempus Consulting: The Indian central bank took a very aggressive move, where they went and bought 200 metric tons of gold, a huge amount of gold. There is a growing belief that emerging market central banks are going to begin to diversify away from dollar as their primary reserve and buy gold.

SIMON JOHNSON: People in the emerging markets love it.

PAUL SOLMAN: Former IMF chief economist Simon Johnson.

SIMON JOHNSON: They're absolutely enthused about the value of gold. They think there's more intrinsic value to gold than perhaps -- perhaps we do. And as they get more money, and as they get more standing in the world economy, they're shifting into -- shifting into gold. Their economies are bouncing back quicker. And that has an effect on gold right now.

PAUL SOLMAN: And the verdict on the dollar would seem to be clear.

IAN MCAVITY: The Reserve Bank of India is a huge holder of dollars. With that batch of dollars, they basically said, if I have got $1,045 or an ounce of gold, I will take the gold.

PAUL SOLMAN: The currency trading desk at San Francisco's Wells Fargo Bank, founded to handle the gold rush. It's headed by Simon Fowles.

SIMON FOWLES: The foreign exchange market is the largest market in the world, with close to like $4 trillion a day going through it.

PAUL SOLMAN: And Wells Fargo is now one of the world's largest players. We were here to show that the dollar isn't just drooping against gold, but against other paper currencies as well.

Trader Max Kaufman:

TRADER: And now you see Canadian dollar strengthening against the dollar, from $130 down to $107.

PAUL SOLMAN: The Canadian dollar is almost back to even with the U.S. dollar, that is. The euro, too, is back near a historic breakthrough point, $1.50 for just one euro. And that could conceivably trigger a move to $1.60, says trader Eric Blanc.

ERIC BLANC, currency trader, Wells Fargo: It's a new number. It's a new -- new direction. It's a new frontier that -- that's -- that's being explored. And people want to know how it reacts. And are there going to be a lot of sellers, or is it just going to keep going because of a panic move?

Safety of gold enticing

PAUL SOLMAN: But, even back at a buck fifty to the euro, the dollar is holding less value than most of the world's other major currencies in 2009. Why? Because the U.S. has been creating even more money -- call it cash, currency, liquidity -- than other countries.

Bob Gotelli is head of foreign exchange sales.

BOB GOTELLI: The Fed has injected a tremendous amount of liquidity. And, during that same period, we have seen the dollar on a trade weighted basis fall about 15 percent.

PAUL SOLMAN: As a result, the U.S. dollar is down more than 50 percent against gold in the past year, the euro less than 25 percent. In short, investors are more worried about inflation in the U.S. than pretty much anywhere else. And, as a result, they're going for the gold.

SIMON JOHNSON: Well, gold has long been regarded as a hedge against all kinds -- all kinds of risk. If there's inflation, gold's pretty good. If the government breaks down, you can bury some bars of gold and come back and get it later.

If you're worried about the U.S. government not being able to pay its debts, if you're worried about the dollar collapsing, if you're worried about worrying, you go out and you buy gold.

PAUL SOLMAN: Now, Simon Johnson is explaining, not suggesting. And the government is aware of the dangers, too.

At the NewsHour forum with the Federal Reserve chair this summer, Ben Bernanke was explicit.

BEN BERNANKE: We have had a lot of stimulus, which we're trying to use to make the economy grow. Once the economy starts to grow and begins to move ahead, then it will be very important for the Fed to unwind, raise interest rates, bring that credit back, bring the money back, so that we don't have an inflation problem down the road.

PAUL SOLMAN: Betting against the dollar, then, is betting against the Fed. When investors last bet against the dollar with gold, they drove the price to $850 an ounce back in 1980. A good investment?

IAN MCAVITY: Basically, since 1980, gold has been the worst performing asset category relative to the stock market, relative to U.S. GDP, relative to the U.S. CPI, which basically says gold has got a long way to go from these current levels just to catch up. You know, that's an angle that people aren't looking at.

The inflation-adjusted number in the official CPI would be just shy of $2,400 an ounce. So, we're only halfway there.

WOMAN: Another 18-karat, Nancy.

PAUL SOLMAN: And, even at today's price, while there are plenty of plenty of people buying gold, there are just as many selling.

Bets being made

WOMAN: Twelve fifty-one.

WOMAN: Wow.

WOMAN: That's good.

PAUL SOLMAN: A solid gold get-together staged last week at a Walnut Creek boutique hosted by mygoldparty.com, bags of gold weighed...

WOMAN: Ooh, that's our heavy one.

PAUL SOLMAN: ... tested

WOMAN: Oh, my, 22-karat.

PAUL SOLMAN: ... priced in dollars.

WOMAN: Eleven hundred and fifty-six dollars. Pretty good for a day's work.

PAUL SOLMAN: So, who's making the right bet here, the buyers or the sellers, those betting on inflation or against? John Williams has no doubts.

JOHN WILLIAMS: What has been done over the last couple of decades has set up the ultimate debasement of the U.S. dollar. The dollar as we know it is going to become worthless in the years ahead.

PAUL SOLMAN: But people can be wrong. I mean, the last time we were here, we were doing a story about inflation. Inflation went away. We never even did the story. Are you not at all humbled about making these predictions?

JOHN WILLIAMS: Well, I -- in my humble, most humble opinion, we have in place now everything that has been the nightmare of the people looking at this system over time.

PAUL SOLMAN: John Williams' gold dealer begs to differ.

CHARLIE MAMMOSER: Even though gold has gone up $150 in the last month, the dollar still is $1.49, $1.50 to the euro. It's not going nowhere. So, I think it's more feeding of itself. It's going up, so more people are jumping on the bandwagon. That's kind of how I see it.

PAUL SOLMAN: So, this is just a speculative bubble even, perhaps?

CHARLIE MAMMOSER: Yes, that's kind of how I see it. And I'm just wondering, when's it going to pop?

PAUL SOLMAN: Today, gold soared to a new high, and closed at $1,187 dollars an ounce.

JIM LEHRER: Paul Solman will answer your questions on gold and other topics on his Business Desk blog at NewsHour.PBS.org.