The Gold Price in a Banking Crisis

The smell of bank runs is in the air...

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Why More Governments Could Start to Buy Gold

Venezuela's recent moves make sound investment sense. Other countries may follow its lead...

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Thanks Banks!

Distrust of the financial sector is driving gold and silver higher...

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Gold Collateral: A New Global Role

Gold is increasingly accepted as collateral in commercial arrangements...

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Gold Collateral: A New Global Role

Gold is increasingly accepted as collateral in commercial arrangements...

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China’s Gold Buying Dilemma

Buy Gold from its mines or from the market...?

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Gold Prices & Recovery

Will the Gold Price fall when the US economy recovers...?

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Gold Prices Post-G20

With the G20 vowing not to devalue world currencies, has the Gold Price outlook changed...?

EVEN THE MEDIA now treats G20 meetings of world leaders as non-events, writes Julian Phillips at GoldForecaster.

At best, press reports highlight the emptiness of the G20's concluding resolutions. Nor should investors continue to look to them for real change or commitment. But this weekend's meeting produced more than expected in the statement that was made on Saturday – that the attending nations had agreed to avoid "competitive devaluations" in currencies.

The only nation admitting to such practices is Japan. China was not party to such statements, as it has a Yuan level that it considers right at the moment (after putting national interests ahead of international ones). The meeting didn't let the US get away with it either, and pointed out that quantitative easing is an indirect means of devaluing an exchange rate. And so it is.

With US citizens in difficult financial straits buying the cheaper adequate imported goods, much of the new money to be printed will flow out of the Dollar to other parts of the world, not least to earn more interest than charged sitting in emerging nation's government bonds. So here we are at the same place as last week, but with a few more good intentions. What has come out since that meeting is that the US and China are appearing confrontational.

The gold market expressed its disdain of the intentions issued by the G20 by moving back up to $1345 at Monday morning's London Gold Fix. We'd previously seen $1380 per ounce, and the drop off last week was sudden. Gold then resumed that drop, however, as the G20 communique was digested by traders.

So what next? To remove currency crises from our future the global currency markets need global cooperation sufficient to overrule national interests. That's not happening and won't happen in our opinion, so we expect more falls in the US Dollar once QEII kicks in. We look around the world for reasons to change the fundamental picture for gold and can't find any. We do see some saying it is time to sell gold. We know of one fund that has shorted gold. So our search for reasons to sell is sincere.

With that in mind, these are some of the questions we are asking:

• Has uncertainty and instability changed leaving us confident and certain of a stable future?
• Have the nations agreed a sound, effective, currency system that caters for local national problems on the Balance of Payments front?
• Have they agreed systems that effectively enforce this system, so that it is in national interests to subject themselves to that system?
• Has the global economy in all its major parts returned to real growth where economic imbalances are removed?
• Are we certain that the Sovereign Debt crises are over?
• Do we expect the shift in world wealth and power to Asia to be smooth and trouble free?
• Have the votes at the IMF been changed to fully accommodate India and China's proportion of economic power or will the US remain in charge irrespective of such changes??
• Have central banks turned away from gold confident and fully reliant on global currencies...?

If your answers are 'yes' to these then it is time to sell your gold.

One of the dangers in today's world is that emotion can replace reason very easily. Our own troubles can engender such hopes that we lose balance and decide based on our emotions, to our cost. That's why we prefer to use the process called extrapolation. This is where your take the values, trends and activities of today and project them forward to paint the investment scene of tomorrow. What are these?

The G20 meeting was useful, in that it showed how any real desire between governments to agree with each other just isn't there.  The US is understandably clinging to its leverage over world affairs, wanting to change other nations rather than its own behavior, being unable to change its own economic and currency situation. There are efforts there, but these have proved inadequate to date. The Fed has expressed its fear that more QE is needed to bring about not just a real recovery, but to prevent a slide into deflation that will make it nigh on impossible to get out of once it gains momentum.

On the political front the US is approaching an emasculation of power so that it won't be able to take sufficiently strong action to pull itself out of its hole. And if the mid-term elections do result in this it will be so for two more years. It's these next two years in which the developed world needs to take strong action to stay sound, as Asia rises in economic power and importance. As it stands now the developed world can't take such actions. It's not just about the Dollar and the currency world becoming stable again, it's about huge readjustments being made as wealth and power move east. The currency system is facing major strains and changes of interests and exchange rates during this time. Without cooperative action by the world's governments only friction will ensue. And that is what lies ahead if we extend today to tomorrow.

As to a sound global currency system ahead we find it difficult to see that in today's events. The Yuan and perhaps the Rupee have to gain greater positions in the world money system. It is clear that China should be able to raise its leverage inside the IMF to at least the same level of voting power as Europe. The US should relinquish its deciding vote and be capable of being overruled. Is that likely? Unless the IMF sees such changes, there will be no effective body that can arbitrate the structural changes that have begun already in the world economy and world monetary system. And that is what lies ahead if we extend today to tomorrow.

Have the nations of the world accepted that the changes that lie ahead of us all are so large that international interests must take first place in such a way that overall all national interests can be protected and no individual nation establish precedence? Unfortunately not! The world's political systems are designed to cater for national interests irrespective of the impact on international ones. It is the nature of democracy and the nature of holding onto power even where no democracy exists. That won't change. So we see a picture of nations bumping into each other's interests rather like musical chairs, where some nations just can't find a chair.

As to growth, with China and other poorer nations able to supply goods at far cheaper levels than the developed world, either wages must drop to Asia's levels or the developed world must put up blocks to their entrance into their world. Unless they do, developed world currencies will sag even as Asia's want to rise. China is gaining so much from holding the Yuan down and building surpluses that it won't change until it is ready to promote the Yuan to a global reserve currency that it controls and price its goods in the Yuan only. That process is well along now and could be tomorrow's reality in 2011. Currency crises will proliferate then, with the Dollar and the Euro in the spotlight. And that is what lies ahead if we extend today to tomorrow.

Have the austerity measures been sufficient to resolve Sovereign Debt crises? Giving the Eurozone nations the benefit of the doubt we accept that they may succeed (despite the belief in some quarters that Greece will default in three years time and the UK looks like tipping back into recession). It may be at the cost of more double-dip recessions in other countries or worse, but that's not the point. The point is that the US is just about at the top of the list of nations that are over-borrowed. What austerity measure have they undertaken or will undertake? We have to wait and see if such measure will be successful where applied. What of nations that are over-borrowed and are doing nothing about it. We need strong actions alongside strong growth world-wide before we can gain confidence that such crises will go away. We can't see it. And that is what lies ahead if we extend today to tomorrow.

Have central banks reaffirmed their confidence in the currency system we now have and continued to sell gold reserves, completely reliant of currencies? What we have seen are central banks turning from selling 500 tonnes a year to buying 500 tonnes per year or moe, as they realize that Gold Bullion is badly needed when currencies fail. And more of that is what lies ahead if we extend today to tomorrow.

Clearly then we see no reason to believe that gold has peaked. It's not about a technical picture dictating supports and resistances; it's about a globally changing and broadening market that is altering the parameters of the technical picture. With investors like central banks acquiring gold at any price, how can the technical picture dominate?

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Gold As A Means Of Exchange

Will Gold ever be a Means of Exchange?  Will Gold be a measure of Value?

WHEN PEOPLE WRITE about gold as money, it means different things to different people: money is what most people see as a means of exchange, something you use to pay for goods and services simply that, writes Julian D.W. Phillips of www.goldforecaster.com.

However, gold need not be money in the same way at all. Many gold bugs would like to see gold be money in the system, but as gold supplies are so limited, is this realistic? But now that central banks are Buying Gold and some banks are using gold as collateral, gold has returned to a deeply realistic monetary role in the money system. The Bank for International Settlements set of transactions confirmed this emphatically (Read more about the BIS gold swaps here). So what's the difference?

In the early part of last century, the world used the Gold Standard, a system where gold certificates represented an amount of gold. These certificates then transformed into gold-backed currencies and actually were exchangeable into gold. This then halted with the passing of the Gold Standard and in the monetary system, only central banks could exchange gold between each other. The belief and theory behind this was that governments would only issue currency against the gold it held. This was finally halted in 1971 by President Nixon.

When the Gold Standard failed, it was found that the British government had over-issued currencies far ahead of the gold it held. The Gold Standard was deemed a failure. Then governments worldwide dropped the Gold Standard in favour of currencies without any backing whatsoever. That's when gold ceased to be a Means of Exchange. Gold was blamed for the failure instead of the system set up around gold. Had the Pound Sterling been devalued in terms of gold, this problem would have been solved. Let's emphasize that point gold did not fail, it was the relationship paper currencies had against gold that failed!

After the Gold Standard failed gold was relegated to the role of an 'important Reserve Asset' (one of the assets in the portfolio of a nation's reserves alongside foreign currencies). A campaign to discredit and sideline gold in the monetary system was undertaken successfully over the next 30 years up to the end of last century. Now, worldwide, we have a system of national currencies which are simply 'promises to pay' by government.

The reality of life today is that paper currencies have captive users. This allows government to control 'means of exchange' and ensure just what is used. Because of that we face an inescapable fact of life and that is gold cannot be used as a "Means of Exchange" anymore. For it to relate to money supply its price would have to be well into five figures, or more, in all of the world's currencies.

International trade requires the use of foreign currencies which must be exchanged for the currency of the exporter's country. For example, South African gold mines sell their gold for US Dollars, but then have to sell these US Dollars for South African Rands. If the Rand strengthens, the miners see their income drop. If the Rand weakens their incomes rises. Gold would be in insufficient quantities at current prices to be used as an international "Means of Exchange".

In theory a currency's exchange rate is supposed to reflect its Balance of Payments status. That is, money coming in, less money going out, should determine an exchange rate. Capital flows are included in this formula. While the US has had a persistently large Trade deficit for more than one decade, this has been ameliorated by capital inflows. However, if foreign surplus Dollar holders lose confidence in the US Dollar, then they will not invest their Dollars back into the US This could prejudice capital flows into the US Across the Atlantic and after the Greek debacle the debt crisis has continued to worsen. The once so strong Euro has seen confidence plummet significantly. Most Euro investors are worried about its future, leaving the world with no solid reserve currency.

The only way to resolve future currency crises is for governments to be bound irrevocably to an exchange rate that does reflect their financial health or pay the penalty of a falling exchange rate. But that won't happen until the world feels the blows of a major global monetary crisis and foreigners abandon the guilty currency. Only then will a systemic re-structuring be considered. In that case and if we extrapolate what happening out there now, gold will have to display its qualities in that crisis before any role for it could be considered.

Gold can serve a role in such a reformed currency world. Provided it became the relatively exclusive domain of the globe's central banks gold can and does serve as backing to a country's reserves in extreme times. (For individuals, as the US Treasury puts it, gold ownership is a privilege, not a right. This privilege can be withdrawn at any time through confiscation.) In desperate times a nation's gold extends far beyond the gold held in the central bank's vaults. Gold confiscation ensures that.

This would apply in particular to countries where their longer-term future looks bleak and far more support is needed than 3-months worth of international obligation's worth of foreign exchange reserves will be required. There, gold can act as collateral to much larger international support over a longer period. Gold is far more desirable than simply its Dollar value in such situations. It can be stretched and made flexible in so many ways as bankers well know. We are headed for inventive times for gold as it finds its most valuable place in the international monetary scene in the near and far future. As a 'measure of value' gold has returned to the global monetary system.

Last week saw evidence that this is happening already in the BIS 'Gold Swap" revelations.

Gold, Silver and the “Double-Dip” Recession

What might a double-dip recession mean for gold and Silver Prices...?

BEN BERNANKE and his close allies at the Fed in Washington are worried by signs that the US recovery is running out of steam, writes Julian Phillips at the Gold Forecaster.

The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of minus 5.7 following the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so. This week we then saw sad employment and housing figures appearing to add to this picture.

The Eurozone is meantime making a temporary renewal of the €442 billion of Quantitative Easing issued a year ago, and now being replaced with similar, but shorter-term and temporary financing for the region's banks. Such policies need more time to work, worldwide. But the Eurozone is placing regulation over growth. We believe this is a serious mistake that will certainly make Mr. Bernanke's fear realized. The markets, by falling as they have this week, are confirming this is their fear too.

We now live in a post-information revolutionary world. This means that policies or announcement of policy intentions rapidly affect consumers, banks, markets and business. Most importantly, it affects confidence from top to bottom. Government actions of late have damaged confidence and by extension the robustness of developed world economies. While there has been a pick-up in business in the last year it lacks the robust quality that comes with future confidence. But governments have to battle between financial correctness and good practical sense.

A man may have over-borrowed and then agreed to a repayment plan, but he may not be able to stick to it because the expected increase in cash flow has been delayed for reasons out of his control. Therefore two choices lie ahead: to bankrupt him or to give him more time to recover so he can stick to his obligations.

Bankrupt him and you have the danger of having to compromise the debt (default and negotiate it down to a repayable level) or destroy his cooperation and turn the debt bad. At international level such consequences are far more complex and potentially damaging. That's where the world's rich nations are now. They want to cut spending and raise taxes before anyone is certain that the recovery is robust enough to cope. This was tried in the 1930's but under circumstances where economies could cope. Bear in mind, this is not just the US but the entire developed world. Eurozone problems have knocked the stuffing out of its economies as all nations, from Germany down have over-borrowed and now need to cut back spending.

At this stage, after the world saw the market shrink, primarily through investor de-leveraging and investor implosion, so is better prepared for anything like that now. De-leveraging will be less, as will investor implosions. But the effect on global confidence will be much harder than in 2007 as people realize that they have to pay the costs of government failures and thus will protect themselves more solidly now. Faith that governments will resolve such problems has been damaged badly. Businesses will be much more cautious about exposing themselves to similar dangers in the future and banks will make sure they are not hurt, even if it means curtailing loans and profits in favor of a sound balance sheet.

Since 2007 what has happened to the perception surrounding gold and to a far lesser extent silver? After a relatively brief dip in the Gold Price, gold recovered and moved to new highs. At that time it was still tarred with the "barbarous relic" image and considered of less quality than global currencies. Since then the broad public perception has noted how gold has provided an ability to hold its price and to rise in the face of currency's inherent weaknesses. Gold is rising in the face of stagnating and weakening stock exchanges, in the face of fears of recession, in the face of sovereign debt crises and a general sagging of confidence in the financial system.

Gold is not simply a safe-haven. The sight of central banks turning from sellers of gold to overall buyers and at worst firm holders of gold has been a step back towards gold in the monetary system. It is now moving back to the position it once held, the underlying touchstone of value.

For years now we have highlighted the reality that there will come a time when markets and their investors will not check the Gold Price in the US Dollar but conversely will measure the value of the US Dollar will measure gold. In many minor currencies this is already an investor perception.

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