Gold price's record run continues as the global monetary system falters

Gold prices have been continuing their run over the past month on lost faith in the global monetary systems. Gold prices gained $100 alone in last weeks trading and is up a total of 31% on the year.

Author: David Levenstein
Posted: Tuesday , 23 Aug 2011

According to David Levenstein, gold is likely to continue going higher and, in the short term, the only thing that could arrest the rise would be a series of margin hikes by the CME

Gold prices continue to surge gaining more than $100 an ounce last week and another $30 an ounce on Monday. Once again the price of the yellow metal scored another record high hitting $1896 an ounce. Up 31% this year, gold is on track for its biggest one-month rise in almost 12 years. Now that the price of gold is a hair away from the $1900 an ounce level I am really intrigued to know what the usual gold critics have to say. Thank goodness they are still around because by the time they wake up and understand what is happening, it will too late. And, that is when they will be advising their clients to buy and that is when I will be selling. But that is still a long way off. But, what is going on in the gold market?

The answer is not found in some complicated economic jargon. Very simply, the global monetary system is faltering. When I first began to explain this, the price of gold was barely above $500 an ounce, and at that time, I was sure that this dilemma would be resolved and that we would not see a complete meltdown in the US dollar, the key currency in the current global monetary system. But, now I am not sure what is going to collapse first; the euro or the dollar. Personally, I think the euro is way overvalued against the greenback and the inevitable drop will help prop up the dollar in the short-term. But ultimately, both currencies are set to tank. In the meantime, gold is poised to go much higher, and yes, we will see corrections along the way.

Gold acts as a barometer telling us that the financial markets as well as the global monetary system are under severe strain. This is nothing new and each time there has been a collapse in a fiat currency, gold has prevailed. It is being bought by investors who are concerned about the state of current fiat system of currencies as they know that gold has always been a hedge against the declining values of currencies as well as a way to protect their savings from becoming worthless. Personally, I think we've reached a stage where gold has become an alternative currency. It has made record highs in US dollars, euros, sterling, yen, Yuan, Mexican pesos, Russian Rubbles, Canadian and Australian dollars, Brazilian reals and South African Rands.

The debt levels of countries in the Eurozone as well as the USA are enormous and possibly unsustainable. Technically speaking the USA is bankrupt and investors are losing confidence in the current global monetary system. So far there has been no answer to this problem apart from "kicking the can down the road."

Last week, the European Central Bank (ECB) spent €14.3 billion ($20.6 billion) buying government bonds to protect large economies like Spain and Italy from the debt crisis. The amount of bond purchases disclosed on Monday was short of the previous week's figure of €22 billion but close to market expectations. By buying Italian and Spanish bonds on financial markets, the ECB has driven down borrowing rates that were threatening those two countries with financial ruin.

In an article published by (AP), RBS senior European economist Nick Mathews cautioned that any sign the central bank is only intervening on an interim basis "will give the market a sentiment that there is a finite limit on purchases."

In that case markets could challenge the ECB's ability to keep yields down. Mathews thinks that the ECB and the Eurozone rescue fund may eventually have to purchase close to half of traded Italian and Spanish debt, or around €850 billion ($1.2 trillion.)

Felix Zulauf, a well-known Swiss fund manager recently had this to say. "Confidence in our currencies, policy makers and central banks is going down the drain. That will be reflected in a rising gold price. I have long said this isn't an environment for investing in stocks. Hold cash in the form of short- to medium-term Treasuries. Own a lot of gold, and don't have debt."

In the meantime, in another interesting development in the gold market, Venezuela is planning to repatriate more than 200 tons of gold, worth about $11 billion. Most of the gold which is held at the Bank of England, will come home "as soon as possible," Nelson Merentes, the president of the Central Bank of Venezuela, told (AP) late Sunday. Venezuelan President Hugo Chavez originally announced plans to repatriate the gold last week, along with taking $6.2 billion in liquid assets and bonds held by Swiss, British, French and American banks and transferring them to institutions in "friendly" countries like China, Russia and Brazil.

While there does not appear to be any problem with this request, the problem spooking the markets is if the BOE as well as the other depositories still have the gold and are able to deliver. Over the years, many market observers contended that central banks and bullion banks leased or sold most of their gold holdings. And, by using the fractional reserve lending system they have sold more than 100 times of what they actually have. So, if they have sold this gold, they will have to find some way to buy it back in order to deliver. And, that could be very interesting.

In the short-term, and one thing that could change gold's upward trajectory could be a series of margin hikes by the CME which look highly probable the closer the price gets to $2000 an ounce.

While I have no doubt that the price of gold is headed much higher and that there are still large gains to be made in the gold market, the chances of making the massive speculative gains made in the last few years in gold are probably over. However, gold will continue to be one of the best performing asset classes of this decade. And, as I have explained in many numerous reports, I believe that gold should be part of every investment portfolio for reasons of diversification and insurance. The main objective is to protect your wealth.

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