-- Posted Wednesday, 30 May 2012 | | Disqus

Gold prices may have fallen out of bed over the past four months. But gold as a currency is gaining ground as gold reserves are increasingly being allocated a more important role in the coming new economic order.

Under a $3.5 billion stabilisation plan being promoted in Germany as the European Redemption Pact the heavily indebted eurozone states would use hard assets such as their gold and currency reserves to back a new type of euro bond.

Gold backed

By back stopping with gold and other currencies the fear of euro bonds opening a pandora’s box of additional spending would be closed. Basically public debts above 60 per cent of GDP would be pooled into the ERP.

Germany would still pay a higher price in terms of interest payments on euro bonds instead of its own bunds. The Latin economies of Europe would be bailed out again, though they would still need to go through recession and austerity to restore their competitiveness.

Gold is also heavily tipped for a new role in the Basle III reserve requirements for the banks. Essentially the proposal on the table is that banks be allowed to include 100 per cent of their gold assets in this ratio rather than half as at present.

See this as a promotion for gold. Banks argue that it has been a safe haven in terms of stability by comparison to other asset classes over the crisis years and so deserves to be upgraded in its reserve status. It is hard to disagree with this assessment on economic grounds.

Central banks

At the same time global central banks from Mexico to the Phillippines and Kazakhstan continue to stock up on gold while prices are low this summer. It is interesting that those countries with experience of currency instability are among the biggest buyers of the yellow metal.

It is a bit ironic then that mom and pop buying of gold from the US Mint has tailed off this year. The failing euro makes the US dollar look a one-way bet but then people forget the US balance sheet is actually in worse shape than the euro zone, so this can only be a temporary phase.

The big banks are only just getting around to taking gold seriously. One estimate from gold bullion dealer Sharps Pixley is that Basle III might result in an additional demand for 1,700 tons of gold.

For make no mistake gold prices will not stay at current levels as this becomes the global currency of choice.

-- Posted Wednesday, 30 May 2012 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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