What Caused Golds Record Leap?

October 7, 2009 | By | Reply More

Gold IngotRumours and facts combined caused gold to leap to a record high of $1043.50 an ounce yesterday quickly followed by hitting $1048 in today’s early European trading before falling back to $1041 at 13.25 Central European Time.

The rumour that the Gulf States are considering dropping the US Dollar for oil trading, and using a basket of currencies, including gold, together with no little encouragement from China and Russia, has gained some ground.

We have mentioned before that these countries have expressed reservations about the continued use of the dollar as the world’s reserve currency but have doubts that the complexities of such a change over can be satisfactorily sorted within a short timescale.

We anticipate that if, or more likely when, this comes to fruition it will be after a long period of negotiated agreements between individual nations before a practical consensus evolves over the make up of the alternative trading currency.

The consequences for the value of the US currency should this come about will be little short of catastrophic bearing in mind that China and others will dump their vast dollar holdings as the US economy slides deeper and deeper into the mire.

Why hoard dollars if their purchasing power erodes almost on a daily basis and with little or no hope of US bonds ever being repaid, or perhaps even defaulting on the interest. Simple but grim! 

Be that as it may, the fact is that the Australian decision to become the first significant economy of the developed west to signal an interest rise has added impetus to the rise in gold, with other precious metals following suit.

Our theory is that the Australian interest rate rise is being perceived by some investors as the first of many to come from other nations, with the likelihood of high inflation following close behind leaving gold in its centuries old situation as the store of value of the last resort.

There is still one outstanding opportunity for precious metal enthusiasts to cash in on the current bull run in gold. While gold has hit new record highs, silver is still shy of its March 2008 high of over $20 an ounce.

The gold silver ratio is over 60  (but only just) while we expect the historical average ratio of the lower fifties to reassert itself before very long. This will mean a silver price of around $25 an ounce if gold hangs onto the upside of $1040 an ounce.

One final observation, do not expect the US to take this situation lying down. The Fed and its minions will continue to play every trick in the book to undermine the rise in gold, ranging from manipulating the gold and silver markets to mounting any propaganda campaign that will scare the dollar doomsayers and encourage the voters.

How could anybody think that the dollar and US treasuries were a safe haven bet just a few days ago when the markets hiccupped but the dollar rose and yields fell? But it happened and no doubt will happen again as President Obama continues to initiate and authorise more and more government spending that the nation cannot afford.

As an example every socialist administration that the UK has had to endure has eventually had to constrain their spending, even to the point of going bankrupt and cap in hand to the IMF for a loan.

Each and every period of socialist government in the UK, from Attlee after the war, through Wilson, Callahan, Blair and now the mentally challenged Brown, has ruined this once powerful and influential nation and left the Right of centre Tory party to clear up the mess.

Looks like a similar scenario is developing in the United States.

Just as in Britain, short-term socialist style populist measures are being cobbled together with no thought of future consequences. The cash for clunkers is a case in point.

Did nobody think through the eventual outcome when the scheme was closed? Now new vehicle sales are way, way down, while Japanese owned manufacturers took the bulk of the artificially stimulated sales. Oh yes, we nearly forgot that cutting pollution, although we wonder by how little, was a major benefit according to the government’s spin doctors!

Right now the US is heading for the abyss, but it is a large and resilient nation with many natural resources and a population blessed with many entrepreneurial and innovative citizens.

It needs a government capable of grasping the long-term essentials for rebuilding the nations prosperity regardless of any short-term voter unpopularity. Unless President Obama, who has some admirable qualities, has a serious rethink, it will be over three years before the voters will have the opportunity to vote in an administration that can straighten out the mess that seems likely to be left.

In the meantime we must hope that a politician emerges who has the integrity, intelligence and desire to put the good of the nation above all the vested interests and can gain the votes of the majority, whatever his party allegiance.

“Cometh the hour, cometh the man”

Until then put your faith in gold and silver.

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