As worlds major economies engage in a competitive race of currency devaluation, the price of gold can only go much higher.
Last week the price of gold recorded yet another record high with the spot price spiking to $1321.80 an ounce. As the price of the yellow metal continues its upward trajectory, there are analysts out there still wondering why gold is trading at these levels and talking about an impending correction.
Recently Dennis Gartman of the Gartman Letter said ". . .we shall urge the greatest of caution upon everyone, everywhere regarding gold. It is not just over-extended to the upside; it is hyper-extended. It is not just overbought; it is hyper-overbought. We cannot strongly enough urge everyone to avoid buying gold here and we shall go so far as to suggest that those who are long begin the process of quietly heading for the exits and to reduce their positions to the most minimal 'insurance' positions possible. Everyone should have perhaps 5% of their liquid assets in gold, but at this point anything beyond that level is excessive."
Yes, perhaps the price of gold may appear to be overbought, but the gold price is hardly making new highs on account of nothing. And, while there are many reasons why the price is going higher, the main driving force behind this rise in price is because the major currencies of the world are debasing and the rising price of gold reflects that fact. Another way to look at this situation is to look at the value of the major currencies and then one may conclude that gold is not really rising – it's that fiat currencies are falling. And, at the moment gold is now being treated as money, and as such it is being valued according to its relationship with other currencies. And, unless there is something drastic about to happen that will reverse the current trend in currencies, don't expect too see the price of gold collapse. This is not the same scenario as 1980 when the price of gold ran upwards to over $800 an ounce and then almost as quickly as it ran upwards, it came back down. This time around we have not seen any parabolic rises in the price of the yellow metal, and the price of gold is merely fulfilling its traditional role as a hedge against the declining values of the major currencies, in particular the US dollar and the Euro.
As the economies of the US and most European countries remain depressed, central banks are going to try various expansionary monetary policies to re-start their economies. However, no matter what they try central bankers and politicians can't repeal the laws of economics. And, the consequence of their actions is going to lead to printing more money that will cause these currencies to become worth even less, and make gold become worth more.
The Fed's actions may have temporarily averted a crash in the US financial markets, and the European Central Bank's interventions may have postponed a string of defaults by indebted governments, but these measures will merely push back the inevitable day of reckoning. Within the next 12 months, the U.S. Treasury will have to deal with refinancing $2 trillion in short term debt. And, that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Add to this is the cost of the wars in Iraq and Afghanistan. How in the world can the Treasury possibly borrow $3.5 trillion in only one year – an amount that equals nearly 30% of the US GDP? Any guesses where the money to cover this will come from? Printing more money of course or more "quantitative easing," as it is now more commonly referred to.
As the US dollar weakens, other currencies strengthen. This puts pressure on these countries as their exports become more expensive and as in the case of Japan, these countries will be forced to devalue their currencies in order to maintain a competitive edge. As a result we can expect to see these countries engage in a competitive race of currency devaluation to increase exports. While we will never see or hear any declaration of a global currency war, we have now entered a period when the entire global monetary system is under stress and the battle of currencies has already begun.
On September 15 former Federal Reserve Chairman Alan Greenspan made a speech to the Council on Foreign Relations. Some very interesting comments he made with respect to gold in response to a question were reported in an editorial in the New York Sun, "Greenspan's Warning on Gold". According to the article Greenspan did not mince his words and said, "Fiat money has no place to go but gold."
As I have mentioned many times in the past, the history of fiat money has been one of failure. It works well when economies are expanding, and have high levels of employment as well as strong GDP growth. But, when economic growth is contracting and central banks try to stimulate economies by pumping money into the system, the result of this action will lead to the debasement of the national currency and ultimately a period of hyperinflation. The most recent example of this was Zimbabwe. Not only did Mugabe's policies manage to debase the currency to the point where it became totally worthless, there was a shortage of the most basic essentials such as bread and clean water. Now, Zimbabwe does not even have a national currency and all domestic transactions are paid for in US dollars or South African Rands. While the collapse of the Zimbabwe dollar only impacted on that country, a collapse in the US dollar will have global ramifications.
While I do not see a total collapse in the US dollar or the euro, and of course I am not attempting to compare these major economic power houses with an insignificant country such as Zimbabwe, there are still lesson to be learnt. What happened in Zimbabwe has many consistencies with what happened in other countries where the national currencies collapsed. Unless the problems of massive sovereign debt, burgeoning government budget deficits, low GDP growth, high unemployment are resolved, the current scenario is unlikely to change. As more and more investors as well as central banks themselves know that the possible conclusion could be a sever drop in the value of their national currencies, they are going to diversify into other assets including gold. As a potential global currency crisis looms, it makes sense to protect at least some of what you have by investing in gold.
As the gold price continues to make record highs practically on a daily basis, the break to the upside of the ascending triangle projects a possible short-term target of $1360. No matter the depth of any future corrections the momentum remains strong and the primary upward trend remains intact.
About the author
David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.
His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.
David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
For more information go to: www.lakeshoretrading.co.za
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.