-   Worries about the outlook for the US economy and the risk of a ‘double dip’ or second economic downturn

-          Deepening concerns regarding unprecedented monetary and fiscal stimulus and the increased risk of higher inflation and possibly stagflation (in the medium and long term) and the resultant negative impact on the value of global currencies

-          Increasing risks posed to the dollar’s status as global reserve currency -  as illustrated by today’s reports of the leading industrial nations discussing using other currencies and gold instead of the dollar in oil transactions

-          The supply demand fundamentals – with gold production having peaked in 2001 and fallen every year since despite gradually rising gold prices and with investment and central bank demand (particularly demand from the People’s Bank of China) outweighing the decline in jewellery demand and the significant increase in scrap supply from the jewellery market

 
The more immediate catalyst for gold’s record highs may have come from the dollar coming under more pressure today after the Independent of London's Robert Fisk broke a story stating that a group of Arab countries, Russia, France, Japan and China and others were in secret discussions to use a basket of currencies and gold to replace the dollar in order to trade oil. Although some officials have denied this report, the fact that it is mentioned at all raises the question as to how much longer the dollar will remain the global reserve currency. According to Chinese banking sources, the transitional currency in the move away from dollars, may well be gold. Gold surged overnight to $1,021/oz on the news of this increasing threat to the petrodollar and then surged to over $1,036/oz this morning.

Another likely more immediate catalyst was the move by the Australian central bank to increase interest rates. This likely further pressurised the dollar. There is an increasing realization that at some stage central banks will have to start withdrawing the unprecedented monetary stimulus of recent months and years. A rising interest rate environment from the unprecedented historic low rates we have now is bullish for gold as it was in the rising interest rate environment of the 1970’s. Then, gold did not peak until interest rates had been increased by Paul Volcker to double digits therefore slaying the beast of inflation that plagued the US and global economy in that decade.


Gold Less than Half Its Inflation Adjusted High in 1980

A close above the record high today should set us up for the anticipated rally to $1,200/oz. However, profit taking could see a correction and consolidation above the previous resistance at $1,020/oz.

Gold remains well below record highs in Euros and Sterling and is likely to rally to new record highs in these currencies in the coming weeks. Investors waiting for a pullback may be disappointed and it may be more prudent to start to dollar (euro/ pound) average into position by buying over a period of days and weeks. This market could get away from those attempting to time the market and buy in at short term lows.

Silver has also surged in value to over $17/oz on the news but remains well below its recent record high of nearly $21/oz and well below the record nominal high for silver of $48.70/oz, set nearly 30 years ago in January, 1980. Silver remains very undervalued vis-à-vis gold.

Gold looks far from a bubble (less than half its real price in 1980) but whether it is or not is irrelevant. It is important that all investors and savers have an allocation to gold as financial insurance. 

Mark O'Byrne

Director 

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-- Posted Tuesday, 6 October 2009 | Digg This Article