In today's economic climate it is absolutely imperative to diversify some of your assets into gold.
Each day it is estimated that the foreign exchange market (often called forex or FX market) trades an estimated US$4 trillion. Up and until now and in spite of the introduction of the euro on January 01, 1999, the US dollar has remained the world's reserve currency.
However, it has lost more than 30% of its value since 2001. And, since the creation of the Federal Reserve, the dollar has lost more than 96% of its value. But, what is amazing is how few investors understand what determines the value of currencies.
Every country has its own currency to facilitate international trade and domestic business. However, when Nixon abolished the gold standard in 1971, he removed any intrinsic value to the US dollar. And, in 1973 the IMF officially abolished gold as part of the monetary system. One of the problems of having a currency backed by gold is that this system restricts monetary expansion and as a consequence restricts economic growth. But, on the other hand when currencies are no longer backed by gold or silver for that matter, they become what is known as fiat currencies. A fiat currency is a medium of exchange composed of some intrinsically valueless substance which the issuer does not promise to redeem in a commodity or a fiduciary money. And, because a fiat currency has no direct legal connection to a commodity money (in terms of redemption) and, therefore, no real economic cost to its production, the supply of a fiat money can never be self-limiting.
The value of these currencies really depends on the economic health a country as well as the perception of stability and confidence in the political climate in those countries. As conditions change currency values fluctuate to reflect the new perceived value. Changes in currency valuations have a significant impact on governments, corporations, financial institutions and ultimately the individual.
Unlike equities and bonds, which tend to be traded locally during the business day in their own time zone, currencies trade practically twenty four hours a day almost seven days a week. Yet, no market is islolated in today's global financial system. For example, US Treasuries have an effect on the value of the dollar which in turn has an effect on forex markets, equities and commodities. And of course as the US dollar is still the world's reserve currency, any change in the value of the dollar can have ripple effects through the global monetary system. But, this is not a one way street and certain global changes can in turn have an effect on the US dollar. This circular cause and effect dynamic has major implications. It effects changes in interest rates, corporate earnings growth rates, stock prices, forex prices and inflationary expectations.
Over the years, central banks have tried in vain to get rid of their gold as they did not see it as a worthwhile asset. From 1980 to 2001 it declined in value and while declining it did not pay any interest. Most investment advisors, stock brokers and financial planners who are in their thirties or even forties, were brought up in a world where gold had no importance. All they knew were the boom days caused primarily by an unprecedented and uninterrupted massive credit expansion that begun in the US in 1980. Suddenly, as we all know, this all came to an abrupt halt in August 2007.
As a result of this tragic economic disaster, countries around the world were sent into recession and governments were compelled to spend trillions of dollars in attempt to prevent a total meltdown of the monetary system as we know it. The problem is, someone has to pay for all this monetary expansion. While those investment advisors in their thirties and forties who have never heard of gold, search for high yielding investments finally realize that in times like this, it is more important to simply protect your wealth they evidently believe that the single safest place to be is in government bonds in particular US Treasuries. But, most Treasury bonds are at record low-interest rates. The long 30 year T-bond now yields 3.77%. and the 10 year T-bond yields a ridiculously low 2.63%.
The national debt of the US is approaching USD14 trillion and soon government debt to GDP will be more than 100%. Gross government debt in the U.S. stood at 85% of GDP in 2009 and will reach 108% of GDP by 2014, according to IMF projections. The U.K.'s gross government debt stood at 69% of GDP in 2009 and is expected to reach 98% of GDP by 2013. With slow GDP growth, high levels of unemployment which will result in a smaller tax bill, governments will experience difficulty funding all this debt. And, as a consequence, they will continue to increase money supply which will ultimately debase their currencies even further. This will cause the value of gold to rise. Since 2001 as the US dollar has lost more than 30% of its value gold in dollar terms has increased more than fourfold.
On August 25, according to Reuters, NEW YORKthe Federal Reserve asked a U.S. appeals court to delay implementing a ruling that would force the central bank to disclose details of its emergency lending programs to banks during the financial crisis. The Fed programs were designed to shore up the financial markets, and more than doubled the central bank's balance sheet to well over $2 trillion, especially after the September 2008 collapse of Lehman Brothers Holdings Inc. Wednesday's emergency request for a 90-day delay came after the U.S. Second Circuit Court of Appeals on August 20 denied a motion by the Fed to rehear the case, which had been brought by Bloomberg LP, the parent of Bloomberg News, and News Corp's Fox News Network. In March, the Second Circuit ordered the Fed to disclose information, including the names of bailout recipients and amounts received, that the news media had requested under the federal Freedom of Information Act. The Fed argued that allowing disclosure could stigmatize banks, causing a loss of confidence that could lead to deposit runs, bank failures and damage to the economy.
This non disclosure of information by the US government reminds me of the continual non disclosure of their gold holdings which are supposedly around 8,000 tons. As unbelievable as it seems the last audit done of the gold inside Ft Knox was done in January of 1953. The years after 1953 saw hundreds of millions of ounces of gold fly out of the US. On August 24 in an exclusive interview with Kitco's Daniela Cambone, Ron Paul called for an audit of the US gold reserves. "If there was no question about the gold being there, you think they would be anxious to prove gold is there," Paul said of Federal Reserve. Now, why won't the US government allow an independent company to conduct an audit on gold? The answer is pretty obvious. Because they don't have the gold they claim to have. And, in today's economic climate, if the US suddenly stated that they have only a fraction of the gold that they claim to have, can you imagine what would happen to the greenback?
My point is, if you look at the problems of global sovereign debt, slow economic growth which translates into weak corporate profits, high unemployment, low interest rates, devaluing values of major currencies, and then add to the mix the potential of a much lower figure of gold held in the US reserves what do we have? We have a recipe for a major calamity. While I cannot see the total collapse of the US dollar the current economic scenario is frightening and if you simply choose to ignore it, you will be financially destroyed over the next several years. And, the only way to protect yourself against this trend is to hold real assets including metallic money such as gold and silver.
Even though the price of gold has been very robust since its previous lows made in July, it seems to be stalling at current levels between $1220/oz and $1240/oz. However, I firmly believe that it will soon break the previous high of $1265/oz but, before the price of gold sets a new historic high we first need to see it break through the key resistance levels of $1240/oz and then $1260/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.
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.