The Coming Gold Standard

 

It is time that we all acknowledge the coming gold standard. I have said on numerous occasions that the price of gold is all about the dollar.  I may have spoken too quickly and in so doing given little shrift to the other fiat currencies around the world that are playing the foil for the dollar in the dollar’s latest run up.  I want to revise my comment and make it more to the point.  The rise in gold is all about the fiat currencies and their diminishing credibility.  This diminished credibility is throwing open the door for the coming gold standard.

If fiat currencies were not being debased at the rate that they are, gold would be reflecting the nominal inflation rate.  Government and Fed speak describe the nominal inflation rate as  between 1 & 1/2% to 2%  on a annual basis.  Everyone who actually buys anything knows that the real rate of inflation is somewhere between 10% and 15% per year. Let’s face it, the government has to lie about the inflation rate because if they tell the truth, the daily deficit would be way above the current $2 billion per day as the cost of living increases get tacked onto the entitlement programs.  The government is truly between a rock and a hard place of their own making!

Systemic Fractures in the Fiat Currency System

The debt concerns surrounding the Euro have caused a devaluation of almost 6% this month alone!  There is little news that would indicate that the “PIIGS”, Portugal, Ireland, Italy, Greece and Spain are on the road to recovery. The ECB keeps trying to get the “PIIGS” to implement  serious  austerity plans with little or no success.   The more they try, the more the people, who have been saddled with this debt, take to the street.

Riots have occurred in the streets of Athens, Madrid, along with protests  in London, expressing the public’s dissatisfaction with their government’s policies.   The socialist dependency on the welfare state is providing  fertile ground for  Marxists to stir the pot of dissension in hopes of bringing chaos to the region which would allow them to take over after the inevitable “people’s revolt”.  This is somewhat akin to what is loosely described as the “Arab Spring”.  Make no mistake about it, these protests are not spontaneous expressions of democratic “free speech”, but rather carefully orchestrated left wing demonstrations.

The results of this carefully orchestrated strategy can be seen in the defeats in regional elections that beset the ruling party in both Germany and Spain.   The ruling class is getting a wake up call and they are not pleased with it because it threatens their very existence.  I would add one personal comment here.  “Change” is not always a good thing, witness the last 2 & 1/2 years of the rule of the “Community Organizer In Chief”.  Sometimes it is better to keep the “snake” you know, than to change for some unknown commodity, but that’s just me!

Things seemingly go from bad to worse for the “PIIGS”.  This past Saturday, Standard & Poors cut its outlook for Italy to “negative” from “stable” , which  followed Friday’s  downgrade by Fitch for Greek debt.  The political situation in Europe is in flux, but there is one consistent factor that remains, The Debt.

The Euro Offers Relief For The Dollar

The Euro’s fall has been the dollar’s gain.  The financial press and investors, flit from one story to another without realizing that these events are directly connected.  This is not a Euro crisis nor is it a flight to safety in the dollar.  It is simply an expression of the diminished credibility of the world’s fiat currencies.

If you take the chart above and flip it over, it mirrors the dollar’s rise.  The problem is that neither currency represents real value and protection of wealth.  That role is being relegated to gold. That is why the price of gold did not drop drastically during this latest correction and that is why the price of gold is creeping back up as the weeks roll on.  Gold inversely mirrors the decline in the fiat currencies.

What we have is investors fleeing one problem and engaging with a new one because they simply have done nothing different in the past.  The euro goes down and they run, like lemmings, to the dollar.  The dollar goes down and they run to the euro. That reflex reaction is changing as the fiat currencies lose credibility.

The Coming Gold Standard

Both China and Russia are rapidly moving toward creating a basket of currencies to form the new world’s reserve currency.  China is definitely in the lead and they will demand that gold be a part of the new basket of currencies that is used for the new reserve currency.  The only thing that is in question will be how large a role  will gold play in the new reserve currency?  When the fiat currencies implode, the world will demand linkage to something solid.  That something has been and will always be gold, because it cannot be manipulated like fiat currencies.

China Becomes World’s Largest Gold Buyer

By: Mark O’Byrne   5/20/2011

Gold and silver are higher again today with the debt-laden dollar, euro and yen all being sold. News that China has become the world’s largest buyer of gold bullion and has seen investment demand double continues to reverberate in the markets and may have contributed to this morning’s strength.

Both gold and silver are marginally higher for the week and after last week’s gain appear to have regained their poise and are consolidating after the recent sell off.

China becoming the world’s largest gold buying nation is very important. While informed analysts have been saying that this would inevitably happen much of the commentary and most of the public remain completely unaware of the huge implications that Chinese gold demand has for the gold market…..

China’s emergence as the next super power of growth will solidify gold’s roll in the next world’s reserve currency.  China has learned what the U.S. Government is willing to do in order to walk on its debt and they are not going to sit idly by while the U.S. devalues its currency. China is moving out of paper debt into physical gold as the chart clearly shows.

In essence, as the fiat currencies collapse, gold will be the base of the next attempt by governments to quell disorder by offering a “currency that you can believe in”.  Empty words, maybe, but the masses will jump on board quickly after what is coming for the U.S. dollar becomes reality.   To qoute the powerful HBO show “Game of Thrones”, winter is coming!

Events That Will Drive The Coming Gold Standard

Sell in May and go away may not be the tale this year.   The gold correction has been pretty mild and it looks like the price of gold has gone back to reflecting the devaluation of the world’s fiat currencies.  The gold miners have not really followed the spot gold prices, so look for a major pop in the miner’s stock prices come this fall.  The stocks can only lag for so long before the reality of the companies profits hit the markets.

There are a few things going on in the world that will propel gold forward come mid summer.  There is general unrest in the Middle East,  conveniently labeled “The Arab Spring” by the progressive media, a civil war in Libya,  Al Qaeda suffering through the loss of Osama Bin Laden, a leadership crisis at the  International Monetary Fund, doubt surrounding how the U.S. political class will resolve the U.S. debt ceiling issue and a shaky coalition government in the UK.   Add to this the burgeoning inflation in the U.S. economy, the lack of growth in the same and the difficulties in the supply side of the mining sector  and we are set for a very interesting summer and fall in the precious metals markets.

Make no mistake about it, we are approaching a new age with the coming gold standard. Be prepared and take advantage of what is coming, or be mowed over and left by the wayside.  The choice is yours.

Till next time, good luck and good trading!

More Gold Market Analysis:

• A Crack In The Dam
• “QE-3 To The Moon, Alice!”
• Why The Chinese are Buying Record Quantities of Gold: Revealed
• Gold Slips On Greece?
• Gross Predicts QE3

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