We are entering a golden era as people begin to lose faith in fiat currencies

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Gold prices bounced back firmly on Friday and were close to testing the $1360 an ounce level. Recently, the price of the yellow metal made a new historical level of $1387 an ounce. 


While the amount is not yet known, it seems certain that the US Federal Reserve will implement its program of further quantitative easing citing high unemployment and low inflation as the cause. In order to prevent any further deterioration in unemployment in the US, the economy needs to have a steady GDP growth of at least 2%.  Personally, I doubt that this new round of monetary expansion is going to have any major effect on the high unemployment rate in the US, but I am certain that this action will lead to the further debasement of the world's reserve currency. And, as this happens, we can expect to see further dollar weakness which will certainly be highly supportive for gold.

Gold is an international currency and it is amoung the most liquid assets in the world. It can be readily bought or sold 24 hours a day in one or more markets around the world. And, the price is very transparent and can be seen anytime no matter where you are.

We are now entering a golden era as people begin to lose faith in their own currencies. When this happens, they turn to gold as well as silver because these precious metals are the only currencies with an intrinsic value. This mistrust of these fiat currencies are the first signs that the global currency system is faltering and if the current currency system collapses, no matter how much "paper" money you have in your bank, it can all become worthless. But, gold has an intrinsic value, and in the last 5000 years, it has never become worthless. While I sincerely hope we do not see such a collapse, I think it wise to take some precautionary measures such as owning gold.  When individuals become disdainful of their own currencies and everyone else's they turn to gold.

We live in times of tumultuous change. We have seen huge financial institutions collapse, equity markets soar and plummet, oil prices sky-rocket and fall, geo political instability, sovereign debt, government budget deficits as well as government invasion into the privacy of individuals. As I have stated on numerous occasions, a  quarter century of uninterrupted and unprecedented credit expansion begun by the US in the 1980s, came to an abrupt halt years later in August 2007 when global credit markets froze, precipitating an economic crisis the severity of which surprised all except those who expected it. And, in order to prevent a collapse of our financial system, central banks were forced to bail out numerous financial institutions. The consequence of this is going to be further monetary expansion on behalf of many central banks and this in turn will lead to more currency turmoil.

In a fiat monetary system, as long as the balance between credit and debt is properly maintained, the system has a good chance of survival. As long as you can service the debt on outstanding credit, you can extend even more credit. But, when the accrued debt becomes so large that it overwhelms the capacity of credit to contain and service it, then the system will falter and if the problem is not addressed, the system could even collapse. We are at that time now.

The problem is particularly serious for the USA simply because the size of their national debt has become so huge the US now owes so much money that only by borrowing more can it pay what it owes. But, not only does the US owe so much money, it is suffering from low GDP growth, and high unemployment. Perhaps a new round of "quantitative easing" will give the economy a very small boost but, the problem of sovereign debt will not be resolved. So, while one problem is temporarily resolved, another old problem re-emerges. I expect to see further debasement of the US dollar as this is a strategy available to the US regarding its unpayable debt. The US could pay down its massive debt obligations by debasing their currency, a strategy wherein the US would pay its creditors with increasingly worthless US dollars.  And, as the reserve currency of the world continues to lose value, gold as well as a range of other commodities are going to become more expensive.

Former Fed chief Alan Greenspan said the U.S. fiscal deficit is "scary" and the federal government needs to cut spending on entitlements. "We're involved in a dangerous game," Greenspan said Oct. 6. "We're increasing the debt held by the public at a pace that is closing" the gap between our debt and "any measure of borrowing capacity," Greenspan said. "That cushion is growing very narrow."

At the beginning of the year when I predicted that gold would to would go to $1350 by year end many industry players including certain well known precious metals consultancies and major financial institutions thought my analysis was very bold, but now I see they are all revising their outlook for the gold price. Many of them are now scrambling to revise their price forecasts upward and suddenly are talking about gold going to $1400 an ounce.

With two months left in this year, there is a good chance of gold going to $1400 an ounce. But, this is not the point.  The price of gold is set to go much higher over the coming years and right now while it is relatively easy to buy gold, I strongly urge all individuals to have some in their investment portfolios.  If the dollar does collapse you could find yourself standing in a very long line at your local coin shop or bullion dealer.  I have seen this happen before and in 2008 there were serious shortages and unexpected delays of bullion products in the US which led to soaring premiums. And, this happened again earlier this year in Greece.

When this happens there are certain dealers who use this scenario to persuade you to buy limited edition medallions that they sell at ridiculous premiums.  Their claim is that these limited edition medallions have greater potential than bullion coins because these medallions have been minted with the face of some famous personality.  And, they will also tell you that the mintages are going to be limited. Usually these "limited edition" medallions come in fancy boxes with a "certificate of authenticity." One important lesson here is that you cannot create rarity and no matter how many of these medallions they mint, they are not rare coins in any manner whatsoever. Rarity is determined by a coin's surviving population from the original mintage. And, the other thing to realise is that these items are not numismatic coins. If a dealer claims these "rare coins" are a better investment than bullion, I suggest you find another dealer. All they are trying to do is sell you a more expensive product which has a huge mark-up leading to an inflated price. But they want you to buy these items because this is how they make more money for themselves. It is important not to be beguiled by these dealers and stick to bullion or bullion coins.

TECHNICAL ANALYSIS

Gold prices were volatile for most of last week, but the push back above $1350 indicates that the prices are likely to trade with an upward bias.

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.