Why the gold price is set to double

The Federal Open Market Committee voted to keep US interest rates steady at their last meeting, citing concern for the economy in spite of persistently rising prices. Had the European Central Bank not elected to keep interest rates steady too, I suspect the dollar would have been lower against the euro Friday.

The dollar has held steady against the euro and the pound since mid-May, fell modestly against the Chinese renminbi and strengthened against the yen and the Swiss franc - pretty much a mixed bag. During this time the gold price in US dollars fell by $90 an ounce, or 12%.

This decline in the gold price during a relatively stable period for the US dollar confirms my belief that metals prices ran too high, too fast, and are merely correcting for past exuberant behavior. I am therefore still raising cash by selling high-flying stocks and waiting for the market to settle down.

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Gold is much more attractive in the low $600 an ounce range than it was three months ago, but I remain concerned that the weakening US economy is going to lead to reduced demand for base metals, which in turn could lead to lower base metals prices and possibly drag the gold price lower as well. Every time I say this I get a flurry of emails pointing out that the economic boom in China and India will drive demand for raw materials for decades to come. I don't buy that.

Economic growth in both China and India is closely tied to US consumption. India's service sector provides outsourcing solutions predominantly for US companies servicing US consumers. Similarly, Chinese manufacturers rely on US consumption for much of their output. At current exchange rates the United States accounts for almost one third of global economic activity, and over 70% of the US's GDP is consumer spending. In other words, US consumers account for almost one quarter of all economic activity worldwide. If US consumption slows down, every large, integrated economy will suffer the consequences; and that includes India and China.

All the economic woes I have been warning about are at hand: housing sales are plummeting, inventories are rising, car sales are falling, companies are downsizing and consumer spending is not quite as giddy as it used to be. This is serious stuff. It all stems from aberrant capital flows that began more than 20 years ago and have not yet been corrected: the US dollar is still about 35% to 50% overvalued. When the dollar finally corrects, the US dollar gold price will double from here. That is why I am not concerned about the current decline in the gold price - the lower it goes, the more money we can make when the dollar finally cracks.

I always feel much better when I know that my opinion is not in the mainstream; without differing opinions there could be no market. We all need other people with different, or opposing, opinions to buy from and sell to. I get nervous when too many people agree with me.

First published on Kitco.com (www.kitco.com)

By 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 (www.paulvaneeden.com). If you would like to read more from Paul, you can sign up to get his weekly commentary at https://www.paulvaneeden.com/commentary.php.