As an article in the Economist put it at that time (“Burnished, Up Goes Gold, Down Goes the Dollar,” December 4th, 2004):

“This is where the gold bulls come in. The fall in the dollar is important, but mainly because as a store of value the dollar stinks. With a few longish rallies, the greenback has been on a downward trend since it came off the gold standard in 1971.”

This rally in gold started in April 2001, when gold last traded in the $250s. Since then, the flight to gold has been mirrored in the dollar’s fall against most of the world’s currencies. Looking back on the gold price charts (see kitco.com) for 2002, 2003, and 2004 we see gold vs. the dollar as a fairly boring story of steady, if unspectacular, gains, which add up to an increase of some 70% in less than four years time. Certainly not a shabby record during what may best be seen as a long period of accumulation.

Gold is a financial comfort for people who are wary of the dollar, but are not comfortable stuffing bundles of foreign banknotes under their mattresses. By banking a portion of one’s wealth in gold, the buyer obtains security, privacy, and permanence while avoiding nervousness about currencies whatsoever.

Going back to a theme that we have propounded over the past few years, this is still a stealth rally in gold, at least in the US. In the US physical gold markets, the last time that gold took on a popular shine in America was during 1998 and ’99, when fears of a millennial computer software meltdown spurred sales. That fear alone was enough to keep most bullion dealers quite busy, even in the face of virtually no price action in gold whatsoever.

Yet in the midst of today’s stealth gold rally, daily bullion business has already surpassed the volume of the pre-Y2K period, with much larger single purchases being the rule rather than the exception. It’s worth noting that, back then, having the heeby-jeebies over the threat of millennial software glitches was a somewhat narrow and acquired taste. Today, a more widely-held article of faith is the US dollar, and gold bullion off-take by individuals is being driven by a universal questioning of that faith.

Gold buyers today are not preparing for some spectacular Apocalypse, but a rather more mundane inevitability – the continued shrinking of the dollar’s purchasing power over time.

Will the dollar implode or just continue to erode? Alert to either possibility, money today is tip-toeing away from the US dollar. Buyers of gold today are seeking an antidote to dollar over-exposure. And because this over-exposure is such a broad-based, worldwide affliction, the probability increases that gold will bring much higher prices in a market of much greater volume over the next few years.

As the Boy Scouts say, “Be prepared.”