Two years ago yesterday, on March 17, 2008, gold first closed above $1,000 per ounce. The London gold fixing that day reached $1,011.25, and the New York nearby futures contract closed at $1,001.40.
While the wearing of the green may be traditional on St. Patrick’s Day, American history shows that March 17 has often been a black day for the dollar and a red-letter day for gold.
On March 17, 1862, the U.S. Treasury abandoned the gold standard by sanctioning the first two issues of Greenbacks, which were not tied to any promise of redemption in gold. As the nation entered its second year of a suddenly-long and costly Civil War, governments of both North and South found it necessary to replace their scarce gold with cheap paper money. By war’s end, the Union printed $450 million in greenbacks. The natural result was runaway inflation by war’s end.
Hmm, rampant government spending devaluing the dollar … Sound familiar?
Over the last decade, gold has more than quadrupled, rising from $255 to over $1,100 per ounce. Oil has risen by a similar amount, as have most other commodities. But it may be misleading to say that gold and oil are rising, when a more accurate description of the last decade is that the U.S. dollar has collapsed.
A decade ago, the dollar was super-strong, riding the crest of a wave of massive federal budget surpluses from 1998 to 2001. The dollar was also energized by the combination of restrained Federal Reserve monetary policies and a technological revolution centered in Silicon Valley. When the federal budget was balanced, gold traded down to $255 per ounce in 1999 and again in 2001. Then the tables turned.
The return of bloated budget deficits and profligate monetary policies — including super-low interest rates and rising money supply, authorized by a politically-compliant Fed – has been eroding the dollar and pushing up gold ever since.
So what’s the best play for gold now that St. Paddy’s has past?
My money is on Freeport-McMoRan Copper & Gold (FCX). FCX is profiting from high copper and mineral prices. The company’s 91%-owned subsidiary, PT Freeport Indonesia, operates the vast open-pit Grasberg mine in Indonesia where gold, copper and silver are mined. Freeport-McMoRan controls proved and probable reserves of about 100 billion pounds of copper, 40 million ounces of gold and 2.5 billion pounds of molybdenum. Freeport-McMoRan is the world’s second-largest copper company behind government-run Codelco. This company not only can benefit from high gold prices, but also from record copper prices that are sure to keep moving up due to the economic recovery. While gold is tied to the dollar, the industrial applications of copper like pipes and wiring provide a good link to actual economic growth. That means we get the best of both worlds with FCX – a strong gold play benefiting from the recovery.
As of this writing, Louis Navellier owned shares of FCX in personal or client portfolios.
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