Gold Tops an incredible $1,000 an ounce

Take a deep breath folks. The next few months are liable to get very bumpy and very wild:

Gold has topped $1,000 an ounce, trading at a historic high of $1,000.25 yesterday morning on weak retail sales numbers, a lukewarm reaction to Treasury Secretary Paulson's plan to improve the housing market, and news that two large funds may go bust.

"This is a sign that the problems are serious, that people are losing faith in the dollar," a former Republican presidential candidate, Rep. Ron Paul of Texas, said. "This could lead to economic chaos."

The price of gold, which has been rising steadily for eight years, has shot up nearly 40% over the last six months as the dollar's plunging value against other currencies has accelerated. The dollar hit a record low against the euro yesterday and was close the weakest level in 12 years against the yen.

It slid to almost a one-for-one exchange rate with the Swiss franc. Driving up the price of gold yesterday were retail sales figures, which showed a fall of 0.6% in February, the second drop in three months, bringing total revenue to its lowest level since last August.

To put this in some historical perspective, in 1967 your dollar could have bought 1/36th of an ounce of gold. Today, that same dollar now buys 1/1000 an ounce of gold.

Speaking of the dollar, it is an embarrassment. Closing at all time lows against many currencies, some economists believe this kind of weakness means we're in for a nasty round of inflation. Other economists disagree but are worried at the severity of any economic downturn. If there is to be a recession, it may last longer and go deeper than it needs to thanks to the inaction by Congress and the Fed on addressing the falling value of the dollar.

In the short term, the weak dollar will improve our balance of payments because American goods will be much cheaper. But this kind of weakness in the dollar will also make foreign goods more expensive, pushing up the rate of inflation.

This crisis has the potential of impacting the presidential race if it continues in the fall, probably to the benefit of the Democrats. But if the Fed can maintain control of inflation and the housing crisis eases later this summer, we may just be able to weather the current storm.