Gold, a great store of value and a truly global currency

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As global sovereign debt and large government deficits continue to influence the value of the major currencies, it appears that Britain is the first major western government to seriously address this problem. And, last week the British Chancellor of the Exchequer, George Osborne, unveiled his 'emergency' budget austerity plans.

The most significant part of Osborne's speech was the part about all the tax changes.  Typically, when governments have created huge national debt and major budget deficits, they turn to the private sector for a bail out plan and this is done by increasing taxes. With regard to the new tax changes in the UK, Britain's VAT, for example, will increase from 17.5% to 20%.  Many personal income tax rates will rise as well, particularly for high income earners.  These changes will be phased in gradually… except for one. Osborne announced that Britain's capital gains tax will increase from 18% to 28% for higher income earners. Yet, unlike the other changes which are phased in over time, capital gains tax change occurs immediately.

While it is not my intention to comment on these moves, I would like to use this scenario as an example of what governments can do. Governments have the power and ability to make major changes overnight. With the stroke of a pen, they can impose capital controls, exchange controls, higher taxes, gold forfeiture, confiscation of retirement savings, or anything else they can think of. And, there is nothing one of us can do about it.

My point is, now more so than ever before, it is important to protect your wealth or at least a part of it. Sadly, thanks to US government, the system of offshore banking which was the most efficient banking system in the world is in jeopardy. People who have wanted to keep details of their assets secret have suddenly been labelled as money launderers, tax evaders, arms dealers, drug dealers etc. It is a sad day to see how much damage these meaningless banking laws have caused. I would understand banks asking questions about someone who wanted to deposit a few million dollars in cash, but really, to interrogate someone who wants to deposit ten thousand dollars?! As far as I am concerned these laws have nothing to do with any of these issues, and instead have been a way for governments to extend their sticky little hands into the pockets of more and more innocent people. Since the time these new laws were introduced, what we have seen is the mass destruction caused by financial institutions, in particular those of those USA. During the same time, we have certainly not seen the destruction of one single financial institution caused by some individual who has an offshore banking facility. Personally, I think it should be the individual investor who should vet the financial institution, and not the other way around.

No doubt you are asking yourself what this has got to with precious metals, especially gold. Well, we already know that governments are going to have to debase their currencies even more during the coming years, and it is highly likely, that as in the case of the UK, a lot of new taxes are going to be introduced as well as other ways to strip the individual of his private wealth. But, there are ways prudent investors can take precautionary measures. And, proper financial planning that incorporates wealth preservation is absolutely imperative. And, historically investing in gold has been one of the best ways for investors to preserve their wealth. It is imperative for people to own some gold, and, if I was resident in the USA, I would either store the bullion myself, or hold it in a bullion facility located offshore.

As I have alluded to many times in the past, gold is not just a precious metal used in the manufacture of jewellery, but it is also a global currency. Unlike the fiat currencies of today, it cannot be printed at will, and artificially devalued. It can also be exchanged for cash in almost any currency at any time, practically anywhere in the world. And, believe it or not, this is not the case for US dollars. I remember too well when on several occasions the banks in Indonesia would not accept US dollars which were printed in certain years.

While I continue to urge individuals to own some precious metals, especially gold and silver, it seems as if the central banks around the world are doing exactly that. Last year, central banks and the IMF reported net purchases of some 425 tons of gold. This came after twenty-two years of net selling by these central banks. In the past year the central banks of Russia, Kazakhstan, India, Venezuela, the Philippines, Sri Lanka, and Mauritius have announced gold purchases.  And, it is likely that a number of other counties, including China and possibly other Mid-east oil-rich states, are buying quietly without publishing or reporting their purchases. When these banks buy gold they usually purchase a few tons at a time. Russia alone bought 117.6 tons last year and another 26.6 tons in this year's first quarter, while the Philippines purchased 9.6 tons and Kazakhstan 3.1 tons in the first three months of 2010.

The first step an individual should take when it comes to buying precious metals is to create a core holding of the physical. In the case of gold this would mean buying bullion bars and bullion coins. After you have built a small stash of bullion, then you can look at the other options available.

TECHNICAL ANALYSIS

The price of gold is exhibiting classic bullish signs of higher highs and higher lows. And, it is very encouraging to see that the increase in price is not moving in a vertical line. This gentle gradient illustrates good solid buying as opposed to panic buying. I believe that the price of gold will soon break its previous high and move towards US$1350/oz.

About the author

David Levenstein is a leading expert on investing in precious metals .He brings over 30 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients. Over the years, David has been published in dozens of publications and has appeared on SABC 3, CNBC and Summit TV (South Africa), and is a regular guest on JSE Direct, a premier radio business channel in Johannesburg, South Africa. He is also a regular commentator on www.kitco.com,  www.mineweb.com, www.gold-eagle.com, and www.infomine.com 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.