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Expect more volatility
October 21, 2005

I expected an increase in volatility in the gold price, and that is exactly what we are seeing. The gold price fell almost 2% on Wednesday, and continued declining Thursday morning as I was writing this commentary. I received numerous emails about conspiracies and manipulation in the gold market already; the gold price falls a few dollars and some people are convinced it has to be the result of manipulation. Markets do not go straight up, and the higher the price becomes, the more volatile it is going to be because emotions and expectations become more and more polarized.

I am still confident that the gold price is going much higher. In fact, due to the recent surge of monetary inflation in the US, I have increased my target price for gold to $830 an ounce.

In a previous article ( I showed that the gold price in US dollars is determined by the relative inflation rate of the dollar versus the inflation rate of gold. This is not only theory, but true in practice as well.

For the benefit of those who have not read the article, the inflation rate of gold is annual mine production as a percentage of the total above-ground supply of gold. The latter is essentially all the gold that has ever been mined, since most of it is still available in one form or another.

The average inflation rate of gold since 1971 has been about 1.6% per year while the average annual inflation rate of the US dollar -- as measured by the increase in M3 -- has been closer to 8%. It is no wonder, therefore, that the price of gold in US dollars is higher today than it was in 1971.

The gold price in US dollars kept pace with the projected gold price as determined by their relative inflation rates from 1971 up to about 1995. During the 1990s, the tremendous demand for US dollars from foreign investors seeking a safe haven from international currency crises lead to a surge in the US dollar exchange rate. This increase in the US dollar exchange rate depressed the gold price in US dollars, but not in most other currencies.

As the US dollar declines, as it has since 2001, the gold price in US dollars will return to its inflation-adjusted price, which by my calculations should be above $800 an ounce by now. But not all of the increase in the gold price will be due to a decline in the US dollar exchange rate because monetary inflation will continue to push the gold price higher.

So when I see the gold price decline, as it has this week, I am not worried.

The gold price increased by more than 13% since July (prior to this week’s decline) without any decline in the US dollar to account for the increase. One possible explanation for the recent surge in the gold price could be the rapid acceleration of monetary inflation in US. Recall that the average increase in M3 since 1971 has been about 8% per year. During the past twelve months M3 has increase by 7.1%; however, if we annualize the increase in M3 over the past three months it comes to almost 11%, indicating an increase in the rate of inflation. Regardless of why US money supply is increasing so rapidly, the effect will be a higher US dollar gold price.

As I mentioned earlier, incorporating the recent surge in US monetary inflation increased my target for the gold price to over $800 an ounce. Therefore, until we see the gold price at those levels I believe there is upside in the market. However, I now suggest you read the first paragraph again: as the gold price increases, gold price volatility will also increase. Predicting short-term fluctuations in the gold price is a fool’s game; betting on them is even worse.


Paul van Eeden

Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website ( or contact his publisher at (800) 528-0559 or (602) 252-4477.

Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website ( or contact his publisher at (800) 528-0559 or (602) 252-4477.


This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be -- either implied or otherwise -- investment advice. This letter/article reflects the personal views and opinions of Paul van Eeden and that is all it purports to be. While the information herein is believed to be accurate and reliable it is not guaranteed or implied to be so. The information herein may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Paul van Eeden, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this letter/article may be reproduced, copied, emailed, faxed, or distributed (in any form) without the express written permission of Paul van Eeden. Everything contained herein is subject to international copyright protection.

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